On the same week Proposition 39 backers attacked four companies for opposing a corporate tax change, a Democratic lawmaker is writing legislation to ban state contracts with such out-of-state firms.
Sen. Kevin de León, D-Los Angeles, has drafted amendments that attempt to end state contracts with companies that legally choose to pay taxes under a longstanding formula that out-of-state companies generally find more beneficial. His proposal, Senate Bill 911, would also authorize the state Franchise Tax Board to disclose which formula companies use to calculate their taxes, information currently shielded under taxpayer privacy laws.
State lawmakers in 2009 allowed corporations to choose between two different formulas - one based solely on a firm's sales in California, which tends to be more favorable to in-state companies; or a formula that also accounts for property and payroll, some form of which has been in place for decades.
Democrats since 2009 have tried to require all companies to move to the sales-based formula, which the nonpartisan Legislative Analyst's Office estimates would generate $1 billion in additional taxes, mostly from out-of-state firms. California is unique in allowing firms to choose the cheaper of two formulas rather than making one system mandatory. Business groups have argued that the state should not raise taxes on any companies in this economy because they provide jobs in California even if based elsewhere.
States long relied on a three-factor corporate tax formula that charged firms based on their proportion of sales, property and payroll in a given state. The thinking was that the formula resulted in companies paying back states for their use of local resources, such as infrastructure that helped factories operate or public schools that educated workers.
But as states recruited businesses in the last three decades, they changed their tax formulas to avoid imposing higher taxes on companies that hire more in-state workers or building more facilities. That was done by placing greater emphasis on the sales component of the formula; California had a "double-weighted" sales factor from 1993 to 2010 and then allowed companies to use the single-sales factor that ignores property and payroll altogether starting in 2011. (Whether the state was able to end its old three-factor formula remains in legal dispute.)
Democrats have failed to get two-thirds support in the Capitol so far, but Assembly Speaker John A. Pérez is pushing legislation this year to change the tax law and reduce state university tuition. De Leòn teamed up with Gov. Jerry Brown last year to pursue legislation that would have returned higher tax revenues to in-state businesses, but it failed in the Senate.
Proposition 39, backed by billionaire Tom Steyer, would require companies to choose the sales-based formula and initially split the money between alternative energy projects and the state general fund budget. Steyer's campaign this week suggested the state should stop buying products from Chrysler, General Motors, International Paper and Kimberly-Clark after they officially opposed Pérez's legislation, Assembly Bill 1500.
"We understand why some out-of-state companies would oppose a California Mandatory Single Sales Factor," de Leòn wrote in a letter this week to the companies asking for a formal explanation of their opposition to AB 1500. "It allows you access to the lucrative California market while paying a lower tax rate than companies based here."
Peter DeMarco, spokesman for the business coalition fighting the legislative tax change, called the contracting change "petty" and suggested it would lead to higher state costs by shrinking the pool of qualified contractors who can deliver goods at the lowest price.
"This says to me they're continuing to try to push other ways to get to mandatory single sales factor when they can't get there on their own legislatively," DeMarco said.