To help break partisan deadlocks over the state budget in 2008 and 2009, Gov. Arnold Schwarzenegger agreed to approve corporate tax breaks that go into effect Jan. 1. Prop. 24 would block those tax breaks, forcing large businesses to continue paying an estimated $1.3 billion more per year.
Opponents — including business lobbying groups such as the Chamber of Commerce, as well as some Fortune 500 companies — say passing the proposition will prompt corporations to flee a state already reeling from high unemployment and a high tax burden that discourages hiring.
California’s tax regulators estimate that about 120,000 businesses in the state would have higher taxes if voters approve Proposition 24.
The California Teachers Association (CTA) and other supporters call the tax breaks a corporate giveaway at the expense of education and other public services.
CTA argues that keeping corporate taxes at their current level prevents further layoffs and keeps teachers in the classroom. The state teachers union estimates 25,000 jobs for teachers, nurses and firefighters would be saved, as well as another $600 million in cuts to the education budget.
The tax breaks that Proposition 24 keeps off the books are ones that let companies choose whether their income tax is based on the amount of their total sales in California, or a combination of their sales and their operations, including payrolls and property.
“It’s meant to fix some of the corporate loopholes,” says Kirk M. Lesh, a senior economist at the California Lutheran University Center for Economic Research and Forecasting (CERF). “It’s sort of moving (operating) losses around, so it could affect ones that would have their tax burden reduced.”
The targeted tax breaks include:
• The “single-sales factor.” This allows multistate corporations to choose whether they will be taxed on property, payroll or sales.
• Loss carry-backs. This allows corporations that are experiencing losses in California’s current economy to get refunds for taxes paid as much as two years previously.
• Tax credit-sharing. This allows companies with more tax credits than they can use to distribute the tax credits to affiliates.
“Long-term ramifications may not be known,” said Lesh. “It could affect business activity, and that should be a concern of the voters, because we need business activity to hire people.”