Gov. Jerry Brown's corporate tax package failed to clear the state Senate in the final hours of the legislative session.
The plan, contained in Senate Bill 116, fell five votes short of passage, by a final tally of 22-15.
The Democratic governor had proposed changing a corporate tax formula to require that multi-state companies calculate their tax liability based on the portion of sales in California. The roughly $1 billion expected to be raised annually through the change, mostly from out-of-state companies, would have been directed to specific tax breaks, including a sales tax exemption on manufacturing equipment.
Democratic Sen. Kevin de Leon argued that requiring businesses to use the single sales factor formula, instead of choosing how to calculate their tax liability, would "get rid of a competitive disadvantage and level the playing field for all California businesses."
"This is not a Democratic issue, this is not a Republican issue, this is a jobs issue," said the Los Angeles Democrat, who introduced single sales factor legislation earlier this year.
Republicans criticized the decision to consider the proposal so late in the session, saying the tax changes should be the subject of a special session after the Legislature adjourns.
Sen. Sam Blakeslee, R-San Luis Obispo, called the plan up for vote a "slap dash collection of ideas that look like they were made for a press release not serious policy."
"I stand here before you as a willing partner to work on tax reform but let's do it the right way; let's do it right this time," he said.
The Assembly approved the bill yesterday, hours after Brown announced that he had secured votes from two Assembly Republicans to pass the deal in the lower house.
No Republicans supported the bill in the Senate. One Democrat voted against the measure and several others abstained.
Brown issued a statement, saying it is "unbelievable that so many politicians in Sacramento would choose to protect cigarette makers and out-of-state corporations to the detriment of California jobs."