If Gov. Jerry
Brown succeeds in eliminating the optional single-sales factor as the method
for calculating corporate taxes (thus raising taxes on companies with out of
state operations, and using the money for tax incentives for hiring and
manufacturing in California), he may have someone unusual to thank: Texas Gov.
Rick Perry, the Republican presidential frontrunner.
Supporters of this change in tax law
have repeatedly invoked Perry’s name – most recently at a gubernatorial press
conference on Thursday. Brown himself has said that if a single-sales-factor
only formula is good enough for Perry and Texas, it ought to be good enough for
California.
This is perfectly fair. Texas
doesn’t give companies the choice of how to calculate its taxes, as California
does. It instead uses a single-sales factor formula that, Texas officials
believe, creates more of an incentive to place facilities and jobs in
Texas.
But this isn’t just about Texas. As
the LAO said in a report
last year, California would be wise to adopt this policy so it doesn’t lose
competitively in comparisons against other big states – many of whom have
adopted single-sales factor. (California has used a formula that included other
factors, not just sales in a state). The LAO said:
The strongest case for single sales
concerns conformity to other states’ policies. If all states impose a corporate
income tax with a single sales factor and a throwback rule, then a multistate
firm’s total taxable income at the state level will be equal to its total
nationwide income. As such, the playing field between multistate firms and
California-only firms will be level. The same would also be true if all states
used the double-weighted formula or the equal-weight three-factor formula.
However, the dominant formula now among the large states is single sales:
Texas, New York, Virginia, Georgia, Massachusetts, Illinois, Michigan, and Ohio
all use single sales while only Florida, New Jersey, and North Carolina still
use the traditional or double-weighted formulas. Pennsylvania is in between,
with a 75 percent weight on its sales factor.Conformity with other states would
prevent California firms from being placed at a competitive disadvantage. Under
mandatory double-weighted sales, a California producer that sells into states
with single sales could well have total taxable profits in excess of its actual
profits. For this and the reasons noted above, we recommend that the state use
a single sales factor. We also recommend that the state keep the throwback rule
to avoid the economic distortions discussed earlier.
(Note:
the throwback rule referenced here refers to a California rule-a rule also in
place in other states — that counts sales shipped from California into states
where the shipping firm has no nexus as California sales for corporate tax
purposes).
The case for this policy change is
strong, never mind Perry’s support of something similar in Texas. But the fact
that Democrats have had to invoke Perry shows just how little they have done to
confront the dominant political narratives in the state, and how the broken
governing system limits options. A $1 billion change like this one is very
minor in the context of the state’s $100 billion budget and its nearly $2
trillion economy, and it’s still not clear if this can get through the state
senate, even with the invocation of Gov. Perry’s unspoken support.
Whose name would you have to throw
around to get anything resembling serious tax reform in the state?