Californians have been treated to a bruising debate over the wisdom of raising taxes to resolve the budget deficit. But recent actions to improve the state’s economic competitiveness have mostly played out behind closed doors, leaving citizens with the incorrect impression that making tax policy in pursuit of economic development is too messy or obscure for democracy.
When the California economy begins its eventual recovery, our best hope for a strong resurgence in job creation will be to ensure we can compete for high-value, high-skill jobs that are in demand on the world market. But for companies who make decisions based on the tax climate – which include much of the high tech, biotech and entrepreneurial sectors – California has not been in the game.
The national, nonpartisan Tax Foundation regularly reports on California’s dismal ranking on business tax climate; this year we rank 48th among all states. We have the highest corporate tax rate in the West, the highest personal income tax rate on capital gains and investment income, and zealous tax collectors. As part of last year’s short-lived budget deal, negotiators suspended two of California’s only business tax incentives: credits for locating in enterprise zones and conducting in-state research and development activities. Mercifully, the suspension of those credits was only temporary.
But on a more hopeful front, the recent state budget compromise found room to address a key source of California’s lackadaisical efforts in business climate improvement. The Legislature agreed to provide a tax incentive for many companies to invest in new facilities and new jobs in California by reducing the weight that those two factors contribute to calculating a company’s tax liability. The current law creates the perverse situation where companies that simply invest in more jobs or property in California can see their tax bills increase. Known obscurely as the single sales factor (SSF) apportionment formula, this change will make California more attractive for growth and investment.
How do we know this? When Massachusetts adopted this change in 1995, it helped stem job loss in the manufacturing sector. A 2003 study found "(t)he sales-only apportionment formula is an efficient tax incentive. Massachusetts gains over $7.00 of additional net personal income for each dollar of reduced state corporate excise tax revenues. This is a significant long-run return in terms of new jobs and higher incomes as a result of the state’s investment."
The California-grown biotech powerhouse Genentech cited Oregon’s adoption of the SSF factor in its decision to build a state-of-the-art biotherapeutic "fill/finish" facility in a community outside Portland.
Recognizing the importance of encouraging new job-creating investments, more than 20 states have adopted the SSF formula substantially or completely, each with the knowledge that a short-term reduction in corporate tax revenues would be easily overtaken by increased investment and business activity that directly produces more property and income taxes, as well as other state and local income.
After many years of ignoring our deteriorating tax climate, California policy makers have finally sent a signal to investors worldwide that we want our share of new, high-value jobs and investment.