Katy Grimes:

The California Senate killed Assembly Speaker John Pérez’s AB 1500, which would have taxed out-of-state businesses. Ding dong, one more tax measure is dead… for now.

Perez worked like a mad man on Friday to try and nab enough Republican support for his “middle class scholarship” bill. But it wasn’t about the scholarship–it was just one more attempt to tax businesses for another type of California welfare program.

When Perez saw that he didn’t have the votes at the eleventh hour, he gave in.

Single Sales Factor

AB 1500 was a $1 billion tax increase on out-of-state businesses that create jobs, pay taxes on their property, sales and payroll receipts, and have thousands of employees in California.

As California Employers Against Higher Taxes correctly pointed out, “Proposition 24 sought to make this change in 2010, and California voters overwhelmingly rejected it by two million votes.”

Perez said that a tax loophole is costing California $1 billion per year. But it was not really a loophole: Until the 2011 tax year, corporations had been calculating income taxes using property, payroll and sales for more than 40 years. AB 1500 would have removed the traditional tax calculation, and taxed companies solely on income.

According to the California Manufacturers and Technology Association, far too many businesses that employ thousands of Californians would pay more taxes under a mandatory Single Sales Factor, regardless of where they are headquartered.

According to The Tax Foundation, California compares poorly to other states in terms of how its tax climate effects the ability to attract and retain jobs. Only 13 states currently mandate SSF as the sole calculation method. In order to compete nationally, California must do a better job of giving companies a reason to come here, invest here and create jobs.

Under current law, SSF is available for any company for whom it makes sense, and others may elect the traditional formula and pay taxes based on their sales, payroll and property.

Wheeling dealing

“The altered proposal would have exempted tobacco giant Altria from the tax hike, as well as other big corporations. It would have restored the state’s Healthy Families healthcare program for low income children, which was eliminated in the budget Gov. Jerry Brown signed earlier this summer,” the Los Angeles Times reported.

Perez tried his best to wheel and deal, but Republican lawmakers resisted.

California’s free-fall

As California remains mired in one of the worst economic free falls in state history, it clearly was not the time to overturn the bipartisan legislative agreement designed to create jobs, stability and predictability.

Even with concessions and exemptions, Perez was unable to negotiate his way into support for the tax increase–because every legislator in the state has out-of-state businesses residing in his or her district. Jobs and businesses matter more than ever.

The Tax Foundation explains that California’s individual income tax has the second highest rate and one of the most highly progressive structures in the nation. “In 2010, California’s state-level individual income tax collections were $1,229 per person, which ranked 5th highest nationally. Since most small businesses are S Corporations, partnerships, or sole proprietorships, they pay their business taxes at the rates for individuals. That makes California’s taxes on small businesses some of the most burdensome in the nation.”

California’s high tax rates, high land costs, high labor and energy costs, and staggering regulations are disincentive enough for out-of-state companies to invest in the state.

Legislators should be providing more incentives to create jobs, instead of continuing to kill off businesses. This defeat was one small step for mankind.

By Katy Grimes

The widening chasm of political philosophy was on display Monday in the Assembly Revenue and Taxation Committee, as one side argued for higher taxes on businesses, and the other pushed to continue with the business tax deal made in 2009.

It’s just another attempt to tax businesses for another type of California welfare program.

The best way to raise the revenue to support the luxury level of government services desired by Californians is to produce more goods and services which yield more taxes, thereby allowing businesses to thrive instead of continually increasing their taxes.

Instead, California is famous for taxing first and then assuming that economic production will catch up.  Any economist will explain that, if California wants more revenue, we have to first increase productivity.

But try telling that to California’s Democratic legislators. Assembly Speaker John Perez is pushing hard to get AB 1500 passed. The bill which would impose a $1 billion tax hike on businesses which are not headquartered in California, but have significant operations in the state.

AB 1500

At Monday’s hearing, Perez said that AB 1500 would close a loophole on “out-of-state” businesses to provide college financial aid for families earning between $80,000 and $150,000 a year.

Even with another tax in place, before any money can be spent on college kids, it has to be collected.

But the new tax will also increase taxes for some California voters and target businesses whose only apparent crime is being headquartered outside California.

The punishment

AB 1500 would raise taxes on businesses and employers who operate inside California, but are headquartered out-of-state. Unlike the previous versions of the legislation, this bill claims that the proceeds will go to creating a “Middle-Class Scholarship” for California’s public college students. This bill will become operative only if AB 1501, the companion bill which establishes a middle-class scholarship program, is also passed.

Perez said that, if AB 1500 is passed, tuition costs for California’s public universities would decrease by two thirds, and California’s Community College system would receive a $150 million infusion of funds. However, the bill is light on details about this scholarship fund.

The 2009 deal

In 2009, state law was changed and agreed to by both Democrats and Republicans to allow the use of the single sales apportionment factor to be used by businesses. The “corporate tax break,” imperative for stimulating business in the state, allows businesses to choose whether to have their income tax based on the proportion of their total sales within California — or on a combination of their total sales and operations, which includes payrolls as well as property.

AB 1500 would repeal the “elective single sales factor” provisions approved in 2009, and eliminate the “loss carry forward” and “credit-sharing” provisions approved in 2009.

Perez calls it a “loophole.”

AB 1500 is a very large tax increase on retailers and businesses, but specifically on manufacturers that create jobs for California workers. Many businesses headquartered outside of California still create jobs, pay taxes on their property, pay sales and payroll taxes and have employees who live in California.

Passage of AB 1500 will primarily discourage companies from investing and creating jobs in California, and can only serve as one more reason for businesses to pull out of the state.

Perez claims it will only target big corporations. But State Franchise Tax Board records showed that Proposition 24, the 2010 ballot initiative and predecessor of AB 1500, would have impacted 120,000 businesses, large and small.

Dorothy Rothrock with the California Manufacturers and Technology Association testified that the CMTA opposes AB 1500 because of how unfairly it targets small and large businesses, just because they have operations in California, but aren’t headquartered here.

“Many companies have significant investments of property, equipment, facilities and payroll in California, but have sales into the state that are relatively large in comparison,” Rothrock said. “Forcing them to use Single Sales Factor would be a tax increase even though they would be operating as they have for many years. Nothing justifies this increase They are imposing no additional burden on government services, nor will they be able to avoid the tax increase through reasonable in-state investments and/or hiring.”

Reneging on the deal

This is the Democrats’ third attempt to eliminate the 2009 bipartisan agreement created to encourage companies to invest in California. It was part of the deal that included then Gov. Arnold Schwarzenegger’s $13 billion tax increase. But before the ink was dry on the 2009 deal, Democrats were already working on ways to undo the law.

Last year, Democrats tried to pass this $1 billion tax increase. But ABX1 40, and SB 116 could not get enough votes in the Legislature to pass.

Similar to AB 1500, the goal of Proposition 24 was to stop several corporate tax breaks that were scheduled to go into effect in 2010 and 2012, and would have prevented eligible corporations from receiving about $1.3 billion in tax breaks per year.

Proposition 24 was overwhelmingly defeated despite being sponsored by the California Teachers Association. “With our schools being slashed by $17 billion over the past two years and 26,000 teachers potentially facing layoff, now is not the time for the state to be giving tax breaks to large corporations and oil companies,” said CTA President David Sanchez. “Teachers want big businesses to pay their fair share in these dire times of deep cuts everywhere.”

At the hearing Monday, Sen. Kevin de Leon, D-Los Angeles, testified on behalf of Perez, and once again claimed that Democrats didn’t fully understand what they were voting on when they passed the 2009 law.

A succession of students at the hearing called for more spending on higher education and cuts to the fees that are forcing more and more students into debt. “Businesses aren’t educating their employees any longer because they can’t afford to,” one student said.  The student was correct about one thing. Businesses can’t afford to help educate employees because they have to pay such high taxes, and are penalized through restrictive regulations.

Another student testified that she has to work 20 hours each week and will still have student loan debt upon graduation.

Working 20 hours a week while going to school is hardly torture, and in fact will probably make this young woman far more marketable than her non-working classmates.

Following the students in support of AB 1500 was a succession of labor unions, teachers unions, state employee unions, and the firefighters union.

Loophole or not?

The use of the word “loopholes” would suggest that out-of-state corporations have an escape clause, allowing them to avoid paying proper taxes to the state. But this is just rhetoric.  “Companies, therefore, that make products in other states and ship them here for sale would tend to pay more taxes under mandatory single sales,” the LAO wrote in 2011. “While it is very difficult or impossible to project the precise overall effect of switching from optional to mandatory single sales for the state’s economy, it is clear that different companies would be affected differently depending on their circumstances.”

Rothrock explained that the 2009 tax agreement allowed a new option based solely on sales receipts, because not all companies are structured the same. She explained that the single sales factor penalizes manufacturers of bulky, expensive products and fails to recognize that many out-of-state companies have made significant investments of property, equipment, facilities and employees in California.

Rothrock said that businesses have been operating this way for more than 40 years in California.

California’s tough climate

California businesses, and businesses operating in the state, have remained and continued to do business, even during the worst economic downturn in the state’s history, based on the anticipated tax savings. Democrats and Republicans agreed to the 2009 tax law changes during critical budget negotiations.

Representatives from International Paper, Kimberly Clark, General Motors and Chrysler testified that AB 1500 is a tax increase that unfairly punishes some companies while favoring others.

“By moving to a mandatory single sales factor, AB 1500 punishes taxpayers who neither supported SSF, nor ever planned to use it,” Rothrock said. “This will further erode California’s ability to attract and compete with other states for business investment and hiring.”