This piece was co-authored by Teresa Casazza, President of the California Taxpayers Association
The effort to raise more than a billion dollars in new taxes
by forcing some corporations to use the single sales factor apportionment formula –
even though the formula may not accurately determine how much income is taxable
in California – violates a number of
taxation principles, and only serves to enhance California’s reputation as a
bad place to do business.
State legislators and the governor are trying to create a
billion-dollar tax increase on some corporations by passing SB 116, which will
end corporations’ ability to choose between paying their state taxes through a
single sales factor or through a formula that includes property, payroll, and
sales factors.
Just two years ago, the Legislature agreed to change to the
optional tax plan to encourage business growth in the state. When an effort to
repeal the new law was placed on the ballot by initiative last year, the people
rejected the repeal effort, agreeing with taxpayer groups that said the
initiative would reduce job opportunities for Californians.
Now SB116 has been amended to include some laudatory
provisions to stimulate job growth; however, it is at the expense of a $1
billion tax increase on other businesses.
The first principle of taxation that this constant activity
violates is that taxes should be certain. Adam Smith wrote in his seminal work,
"The Wealth of Nations," that certainty is a matter of so great importance that
"a very considerable degree of inequality … is not near so great an evil as a
very small degree of uncertainty."
Businesses need certainty to plan and build for the future. Before
an entrepreneur decides to build a new manufacturing facility, or expand an
existing business, he or she makes long-range plans to make sure the costs will
be manageable. Since taxes are a major cost of doing business – especially in a
very high tax state like California – they figure heavily into the long-range
plans. Constantly changing tax laws undermines certainty, and essentially
encourages business owners to take their investments and jobs elsewhere, where
the tax structure is stable and predictable.
A second principle violated by this tax increase effort is
that taxes should be fair. One size doesn’t fit all in the corporate tax world
(or the personal tax world, which is why personal income taxpayers have many choices,
including the well-known "married, filing separately" option that improves
fairness for taxpayers in "community property" states). For some multistate
taxpayers, the mandatory single sales factor also would force them to pay more
taxes than they truly owe. Taxpayers should not be required to pay taxes on
income not earned in California – which is what this bill would do. Thus, this
plan would violate another principle of taxation.
Common sense tells us that, to rebuild the economy and
encourage businesses to grow in this state, California must put out a welcome
mat of reasonable tax policy. Offering choices on certain taxing methods is not
uncommon, and is welcoming to employers who choose to invest and grow their
businesses in California. Under existing state and federal law, for example,
businesses can choose from different formulas such as IRA treatment and
inventory valuation treatment in preparing tax returns.
SB 116 adds a huge tax increase on some businesses at a time
when economic growth and job creation should be the path followed to free the
state from its economic doldrums and budget shortfalls.
While this bill violates many taxation principles, perhaps
its biggest flaw is that if it becomes law and reverses a positive action in
support of business, the label that California is not business-friendly will
only be confirmed.