LA Times Thinks (Incorrectly!) that Business is Undertaxed

Loren Kaye
President of the California Foundation for Commerce and Education

In the run-up to the election, the Los Angeles Times waterboarded some statistics, and elicited a confession that … wait for it … California corporations don’t pay enough in taxes.

An editorial followed, which seems redundant.

The basis of this pseudoanalysis seems to be this truism: voters don’t like "corporations." With that as a premise, any analysis will do.

But in fact, what could be simpler to understand than this:

· California’s corporate tax rate is 8.84%, and begins with profits of one dollar. It is the eighth highest among the fifty states, and the highest of what would be considered our western or sunbelt competitors.

· The corporate tax rate is mitigated somewhat by strong R&D and enterprise zone tax credits. These are not inventions by sneaky corporate accountants, they are incentives created by the Legislature to advance worthy public and economic policies – more high-quality research jobs and more businesses locating in disadvantaged neighborhoods.

· Overall business taxation in California is offset by the tax benefits of Proposition 13. This is a feature, not a bug. Whenever I look at California’s tax climate, I say a prayer of thanks for Prop 13, not coincidentally adopted by the People, not the Legislature.

· But add to business tax burdens the 10.55% top personal income tax rate, paid by shareholders of S corporations and small business owners in sole proprietorships, as well as a nation-leading state and local sales tax rate pushing nine percent, and you begin to flesh out the picture. And that doesn’t include the hundreds of local government taxes and fees on business.

· And what states are shown to have a higher proportion of business taxation than California? Alaska (which has no income or sales tax), Florida (which has no income tax), Nevada (which has no personal or corporate income tax), and Texas (which has no income tax). Oh, and New York, which is locked in an annual competition with California to see who can be most unfriendly in taxing businesses. Florida, Texas, Nevada, California, New York … where are businesses locating these days?

The Times also freely spreads the long-discredited canards about two of the tax lobby’s favorite targets – oil and Prop 13.
· California does not have an oil severance tax for good reason – it taxes oil production just as aggressively as other oil production states that do have severance taxes. Other oil producing states with a severance tax do not levy corporate or sales taxes on oil production to the degree that California does. Right now, California taxation of oil production is in the middle of the pack of oil production states. Adding a severance tax in California would pile new and uncompetitive taxes on California-produced oil only.

· The mythical property tax shift from business to residences belongs in a Grimm’s Fairy Tale. As Cal-Tax found in a 2008 study, "Contrary to what supporters of split roll say, Proposition 13 does not shift the property tax burden to homeowners. The assessed value on non-homeowner property subject to Proposition 13 has grown an average of 8.5 percent per year, while homeowners’ property tax has grown an average of 8.3 percent. Thus, the Proposition 13 property taxes paid by non-homeowners have outpaced homeowners’ property tax burden. In fact, Proposition 13 has prevented a property tax shift to homeowners."

The fundamental problem with the Times article, and much of the left-of-center criticism of California business taxation – is that they posit a world where public policy is a passive pawn in the hands of manipulative corporations, in the words of Controller John Chiang, "A lot of the tax credits are given to larger business…"

No, not "given." Companies invest in California, buy equipment and buildings, hire workers, are successful in producing and selling their product or service, make a profit – in California – pay taxes, and earn a credit if they have made investments according to the policies underlying the credit. This is an active, dynamic and competitive economy, influenced by state policy and the interest in businesses in investing here.

More than coincidental – serendipitous, in fact – was today’s release of the Tax Foundation’s 2011 State Business Tax Climate report. California ranked 49th of 50, ahead of only New York, and falling behind New Jersey. Does anyone doubt which publication has a truer pulse on our state’s business tax climate?

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