An Overview of Californias Proposition 39 on November Ballot

California has a voter initiated process that could be called “government by petition” where voters can change the law themselves. California Proposition 39 is an example where voters demand an end to an intolerable tax break that was handed to out-of-state corporations by Arnold Schwarzenegger. The state legislature has repeatedly refused to fix it, so the voters can choose to end the problem.

A Mercury News editorial summarized the problem and the solution: “Venture capitalist Tom Steyer is funding the initiative, which would repeal the absurd law that allows companies to choose the cheaper of two methods of calculating their tax liability. According to the nonpartisan Legislative Analyst’s Office, this costs California $1 billion a year – and here’s the real travesty: None – zero – of the tax savings go to California companies.”

In 2009, Gov Arnold Schwarzenegger gave an incomprehensibly bad tax break to his corporate contributors through legislative sleight of hand. The deal promptly gave corporations an incentive to move to another state while they still reap enormous sales revenue in California.

According to Bloomberg Business Week, a recent poll revealed that 57 percent of likely voters will support the measure while about 29 percent will oppose the measure. 

There are three components of California corporate taxes: payroll, property and sales. The 2009 legislation demands that in-state corporations pay taxes on a 50-50 plan where 50 percent of taxes would be on sales and 50 percent would be on property and payroll.

Out-of-state corporations have two options. They can pay 100 percent of their taxes based on sales or they can pay on a 50-25-25 plan. With the second plan, the firm would pay 50 percent of their tax bill based on sales, and have 25 percent caps on property and payroll taxes. The only thing the law did was to hand over a big incentive for companies to move out of California, where they have a tax advantage over in-state corporations, contribute nothing to the state, and cost the state $1 billion in tax revenue.

Billionaire hedge-fund manager Thomas Steyer contributed $21.9 million to the Proposition 39 effort. The Bloomberg Businessweek article quotes him as saying,

“This corporate loophole only helps out-of-state companies. Nobody else. It saves them just over a billion dollars per year in taxes. On top of that, it is powerful incentive for them not to hire Californians.”

The third-largest revenue source for California’s general fund is corporate taxes. In 2010-2011, the corporate tax yield was $9.6 billion according to the State Legislative Analyst. Adding a billion a year to the state treasury will help with a $15.7 billion deficit that has led to cuts in school funding and services to the poor. The voters are also savvy about spending the money from a revenue raising proposition. One plan earmarks the money for college scholarships. Another plan would direct half to general spending and half to energy-efficiency projects.

To put the state’s finances into perspective, California has the 9th largest economy in the world. California has cities with larger economies than some nations. Los Angeles is just behind South Korea, the San Francisco Bay Area is just behind Switzerland and Sacramento is tied with Bangladesh. More importantly, California is a Federal tax positive state that contributes money to the so called “welfare” states. In other words, California gets less in Federal income than it contributes.

California is also the nation’s most heavily indebted state, which is why giving away tax breaks to out of state corporations or doing any other fruitless corporate giveaways is guaranteed to anger the constituents.