The Assembly Speaker and fellow Democrats are aggressively pushing a dangerous business-killing bill, designed to penalize out-of-state businesses operating in California. Clearly, these legislators do not recognize the importance of all business contributions to the economic health of California.
But even more insidious, this bill is just another hackneyed repackaging of similar bills that have failed to pass the smell test with voters, and even legislators. But this version is worse because it contains none of the tax credits or other incentives from the 2011 bills, the last attempt to repeal a business tax credit.
AB 1500, by Assembly Speaker John Perez, D-Los Angeles, would raise taxes on businesses and employers who operate inside California, but are headquartered out-of-state. Unlike the previous versions of the legislation, this latest bill remodeling now claims that the proceeds will go to creating a “Middle-Class Scholarship” for California’s public college students.
Perez said that if AB 1500 is passed, tuition costs for California’s public universities would decrease by two thirds, and California’s Community College system would receive a $150 million infusion of funds. However, the bill is light on details about this scholarship fund.
State law was changed and agreed to by both Democrats and Republicans in 2009 to allow the use of the single sales apportionment factor to be used by businesses. The corporate tax break, imperative for stimulating business in the state allows businesses to choose whether to have their income tax based on the proportion of their total sales within California – or on a combination of their total sales and operations, which includes payrolls as well as property. Perez branded it a “loophole.”
AB 1500 is a very large tax increase on manufacturers, retailers and other businesses that create jobs for California workers. “AB 1500 is a $1 billion tax increase on companies that create jobs, pay taxes on their property, sales and payroll receipts, and have employees in California,” explained Mitch Zak, with California Employers Against Higher Taxes. ”It will lead to uncertainty and instability, and discourages companies from investing and creating jobs in California.”
Legislative Analyst Mac Taylor recently wrote to the Legislature. “Current law allows companies two ways to pay their fair share of taxes. AB 1500 removes one of those options.”
Perez claims it will only target big corporations. But State Franchise Tax Board records showed that Proposition 24, the 2010 ballot initiative which was just another rendition of the tax increase, would have impacted 120,000 businesses, large and small. In California, one of the highest tax states in the country, small businesses cannot survive more tax increases.
One, Two, Three Strikes…
This is the Democrats’ third attempt to eliminate the 2009 bipartisan agreement to encourage companies to invest in California. Before the ink was dry on the 2009 deal, Democrats were already working on ways to undo the law.
AB 1500 would repeal the “elective single sales factor” provisions approved in 2009, and eliminate the “loss carry forward” and “credit-sharing” provisions approved in 2008.
AB 1500 is a tax increase that unfairly punishes some companies while favoring others. “By moving to a mandatory single sales factor, AB 1500 punishes taxpayers who neither supported SSF, nor ever planned to use it,” Dorothy Rothrock with the California Manufacturers and Technology Association wrote to legislators. “This will further erode California’s ability to attract and compete with other states for business investment and hiring.”
Similar to AB 1500, the goal of Proposition 24 was to stop several corporate tax breaks that were scheduled to go into effect in 2010 and 2012, and would have prevented eligible corporations from receiving about $1.3 billion in tax breaks per year.
Proposition 24 was overwhelmingly defeated despite being sponsored by the California Teachers Association. “With our schools being slashed by $17 billion over the past two years and 26,000 teachers potentially facing layoff, now is not the time for the state to be giving tax breaks to large corporations and oil companies,” said CTA President David Sanchez. “Teachers want big businesses to pay their fair share in these dire times of deep cuts everywhere.”
Parroting Support For Party Line
Last week, Sen. Kevin de Leon, D-Los Angeles, wrote an op-ed for the Sacramento Bee supporting AB 1500. He claimed that Democrats didn’t understand what they were voting on when they passed the 2009 law. “Yet in the dead of night, out-of-state companies led by the tobacco industry managed to slip in a provision virtually unheard of anywhere in the nation,” de Leon wrote.
Following de Leon’s op-ed, Assemblywoman Susan Bonilla, D-Concord, did the Democrats’ Weekly radio address. She supported AB 1500. Bonilla called for more spending on higher education and cuts to “the fees that are forcing more and more students into debt.” Bonilla also called the 2009 tax arrangement “loopholes” in the law benefitting out-of-state corporations.
The use of the word “loopholes” would suggest that out-of-state corporations have an escape clause, allowing them to avoid paying proper taxes to the state. But this is just rhetoric. “Companies, therefore, that make products in other states and ship them here for sale would tend to pay more taxes under mandatory single sales,” the LAO wrote in a letter to de Leon in January 2011. “While it is very difficult or impossible to project the precise overall effect of switching from optional to mandatory single sales for the state’s economy, it is clear that different companies would be affected differently depending on their circumstances.”
“The 2009 agreement allowed a new option based solely on sales receipts, because not all companies are structured the same,” Zak said. “However, they all have one thing in common, which is they provide good paying, and desperately needed jobs.
Perez’s AB 1500 would force businesses to pay taxes solely on the basis of sales. And it would force a $1 billion tax increase on businesses operating in California which provide important products to residents of the state.
“California remains mired in one of the worst economic depressions in history,” said Zak. “Now is not the time to overturn a bipartisan agreement specifically designed to create jobs and provide stability. We should be providing more incentive to create jobs, not picking winners and losers.”
California businesses, and businesses operating in the state, chose to remain and continue to do business, even during the worst economic downturn in the state’s history, based on the anticipated tax savings. Democrats and Republicans agreed to the tax law changes during critical budget negotiations, and should stick to their agreement.