I think I probably would have titled the article "Revision in tax code to bring jobs"…
Revision in tax code to benefit companies
Hundreds of millions in savings in budget pact
By James P. Sweeney (Union Tribune)
AT ISSUE: CORPORATE INCOME TAXES
The state budget deal included legislation that will cut taxes $770 million a year largely for California-based corporations that sell most products out of state.
Pro: California’s existing tax code raises a company’s income taxes when it expands operations or payroll in the state.
Con: The rule, which allows businesses to base income taxes solely on sales within the state, has not delivered an economic boost in other states.
Online: Union-Tribune politics writer John Marelius will take your questions and comments on national and state politics during a live online chat from 10 to 11 a.m. tomorrow at uniontrib.com/chat.
SACRAMENTO – Three years ago, the large biotech company Genentech announced it would build a new, 300-employee packaging plant 20 miles west of Portland, Ore.
At the time, Genentech had large tracts of vacant land at its South San Francisco headquarters and at its plants in Oceanside and Vacaville. It still does.
The company considered expanding in Vacaville, but chose Oregon for many reasons. The state and local governments offered incentives worth almost $5 million. But the decisive factor was Oregon’s corporate income tax structure, said Stephen Juelsgaard, an executive vice president of the company, which employs about 11,000 people.
“There are a lot of similarities (between California and Oregon) in terms of things that you look at, but I know the biggest difference was the level of state income tax involved,” Juelsgaard said.
That will no longer be the case as the result of an obscure – but significant – tax code change tucked into the recent California budget deal. The revision will save corporations such as Genentech, Intel, Qualcomm and others up to an estimated $770 million a year, initially.
In exchange, corporate chiefs and other proponents say it will help protect existing jobs and eliminate a strong incentive for businesses to take jobs and expansions out of state.
“There’s no doubt this is something that will create jobs,” said Assemblyman Nathan Fletcher, a San Diego Republican who pushed hard to get the tax revision included in the budget deal.
Others, citing experiences in other states, are doubtful. But their questions, as well as supporters’ arguments, were scarcely heard because there were no public hearings on the tax cut – the largest of several included in the budget – or on the budget itself, a hard-fought bipartisan compromise to close a $42 billion deficit.
After three months of stalemate, an agreement was forged last month by legislative leaders during marathon, private negotiations.
Until recently, it’s doubtful that few beyond corporate CEOs, policy wonks and tax experts had ever heard of the so-called single sales factor, the tax provision sought by some of California’s most powerful corporations, particularly the biotech and high-tech industries.
California and most other states historically have based corporate income taxes on the percentage of a company’s sales, payroll and property within the state.
Under that formula, businesses that sell most of their products out of state complained that adding jobs and building new plants in California would increase their state tax rate.
Oregon and a growing number of other states – now including California – have decided in recent years to allow corporations to base their taxes solely on sales within the state.
“When you look at having a system where if you add jobs, your tax rate goes up – it’s just illogical,” said Fletcher, a freshman assemblyman who made the tax code change his top priority.
Corporate giants such as Microsoft and the tobacco and auto industries, which count on California for a large share of sales but have few if any plants or employees in the state, prefer the old rules. Basing their California taxes on sales alone would amount to a large tax increase.
Rather than take on those corporate heavyweights, lawmakers and Gov. Arnold Schwarzenegger decided to let California businesses have it both ways. Of 15 states that have switched to a “single sales” formula, only two others give corporations both options, according to a spokeswoman for California’s Franchise Tax Board.
The revision does not affect agriculture, mining, oil extraction or banking industries. All still must pay California taxes on a formula that includes sales, payroll and property in the state.
The estimated $770 million loss in state revenue is based on the tax board’s estimate that 4,000 corporations will take advantage of the new tax law by the 2012-13 fiscal year. It does not take effect until 2011.
If all corporations had been required to pay taxes based only on sales, there would have been only a slight decrease in revenue, something less than $50 million, said Denise Azimi, a tax board spokeswoman.
In addition to Fletcher, Schwarzenegger and other Republicans, the push for a single sales tax policy has long enjoyed bipartisan support. Democrats from the San Francisco Bay Area, where many biotech and high-tech industries are based, sponsored similar bills in the past. But all failed to pass.
“It has been defeated multiple times during the light of day. It only could have become law in the dark of night,” said Jean Ross, executive director of the California Budget Project, a research group that focuses on the impact of public policies on low-and middle-income Californians.
Ross, who has studied the subject extensively, said the history of states switching to single sales formulas is rife with examples of unfulfilled expectations.
Massachusetts made the move in 1995 at the request of Raytheon, one of the state’s largest employers. In the years immediately afterward, the defense contractor reduced its work force in the state. The company said it had no choice but to cut back as a result of a national contraction in the defense industry.
Between 1995 and 2004, Massachusetts lost more than 107,000 manufacturing jobs, according to a 2005 study by the Center on Budget and Policy Priorities, a nonprofit research institute in Washington, D.C.
While most states have lost manufacturing jobs since 1995, states that converted to a single sales tax formula “have not fared appreciably better,” the study found.
What’s particularly troubling about California’s revision, Ross argued, “is it says you can have it your way. Calculate your taxes based on the old formula. Calculate your taxes based on the new formula . . . and send us the lower number.”
At Genentech, Juelsgaard said the change is expected to lower the company’s state and federal tax rate from 30 percent to 28 percent. The company will not disclose what that means in dollars, nor will it say how much the single sales formula shaves from its state tax rate. Like personal state income taxes, those a company pays to the state are deductible from its federal taxes.
The single sales revision puts California “on a level playing field with other states” and almost certainly will influence Genentech’s future expansion considerations, Juelsgaard said.
“We like California,” he said. “It’s a great place and it would be nice to have our employees and our facilities located closer to headquarters. But, in order to make that happen, we felt a change in the tax system was really needed.”