Revision as of 15:23, 29 July 2010

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Yes on Prop 24 from Bill Balderston

From Bill Balderston:

Prop 24- corporate tax loopholes ---YES, YES

While this is an initiative that attacks regressive tax distribution, it is one that never should have been necessary. The corporate tax loopholes (equating to nearly $2 billion) that it is designed to halt (before full implementation this fiscal year) were all agreed to by both the GOP and Democratic leaderships at the end of last year's (February 2009) budget chaos, even while facing more than $20 billion in deficit. There are three main features to Prop 24:

- it repeals a law that allows business to shift operating tax losses into the past and future;

- it repeals a law that allows corporations to share tax credits with affiliated corporations (87% of these monies would go to 0.03% of California corporations, all with gross income over $1 billion)

- finally, it repeals a law that would allow multistate businesses to use only sales-based income and not have to include property and payroll.

This proposition has been largely initiated by the California Teachers Association, with much help from the California Tax Reform Association. We strongly urge a "Yes" vote on Proposition 24.

Analysis by Jeanne

Analysis of Proposition 24

by Jeanne Rosenmeier

Background

California has a structural deficit which makes it difficult and painful to balance state revenue with its expenditures. Taxes paid by individuals, both income and sales taxes, have been raised. Meanwhile, corporate taxes were reduced by the three items this initiative seeks to reverse. The official corporate tax rate is 8.64%, but according to the California Budget Project the average rate paid by corporations in 2006 (the most recent year available) was only 5.2% due to loopholes and accelerated write-offs. The actual rate paid by corporations has been declining steadily since 1987.

Net operating loss carryback

Prop 24 would reverse the enactment of a carryback provision for net operating losses (NOL), and would shorten the carryforward period from 20 years to the prior length (which depends on the type of corporation but is usually 10 years). In other words, Prop 24 would tighten up the NOL rules.

For federal income tax purposes, business losses can be carried back two years and forward 20 years to offset past and future earnings. The purpose of the federal rule is to assess taxes on businesses in a cumulative way that takes into account the ups and downs of the economy and the business cycle. The federal government has enacted a special extended carryback period for losses incurred in 2008 only.

California has never conformed to the NOL carryback concept. Prior to 1994, there was no recognition of net operating losses for California tax. Since then, net operating losses have sometimes been allowed against future income in part or one-for-one. In some years the use of net operating losses has been suspended.

The recent enactment of a carryback privilege for these losses was intended to be a recognition of the severity of the downturn in the economy. The tax break would also extend the carryforward to 20 years. The biggest beneficiaries are likely to be large construction companies, who were extremely profitable before the crash, and thus have profitable years which the current loss years could offset, generating large refunds. Some small businesses will also benefit, although most small businesses pay out most of their profits in wages and salaries.

Recommendation: This is not a black or white issue, but because this tax break mainly benefits large corporations, and because there are already too many tax breaks for corporations, I recommend supporting this provision (we support reversing the tax break).

Tax Credit Sharing Among Related Corporations

Often corporations are unable to use all the tax credits they are entitled to in a single year because they don't have enough tax due. The credits are usually carried forward. Sometimes credits expire before they can be used up because the corporation doesn't have enough profit.

Prop 24 would reverse the current rule, which allows corporations to transfer credits to other "related" corporations. Related corporations have owners who are mostly the same persons or members of a family. This would include corporations owning each other.

These complicated ownership structures are often used to divide up different activities so that the owners have better liability protection. For instance, a construction company might form a corporation just to do one project, often as a joint venture with other corporations. This kind of thing is rarely worth the trouble for very small businesses. The ability to swap around unused credits among related corporations would allow the shareholders to have their cake and eat it too: the liability protection of the corporate structure would be broken into small pieces, but the tax credit benefits would be used as though it were one big corporation.

Recommendation: This is another case of privatizing revenues, while letting the taxpayers pick up the tab for losses. I recommend supporting this provision (reversing this tax loophole).

Annual Election for Apportioning Income

Corporations that do business in California and states or countries other than California pay California corporation tax only on their California-source income. The allocation of income between California-source and non-California-source has been an area of conflict for a long time. Prior to the new rules, net income was allocated based on a three part formula. Basically, each multistate corporation calculated three ratios: 1) California sales to total sales, 2) California assets to total assets, and 3) California wages to total wages. Then the three ratios were added together, with ratio 1) being added in twice; the total was divided by four. The resulting ratio was used to determine the percentage of the corporation's total net income taxable by California.

As part of the budget deal last year, corporations were allowed to elect each year whether to use only one of the three ratios, thus allowing out-of-state corporations to significantly reduce their state corporation taxes. It is an enormous loophole that has no benefit whatever to local businesses. Supporters of this tax break claim that it encourages corporations to keep jobs in California by potentially removing the payroll ratio from the income allocation calculation.

Prop 24 would repeal the choice, and once more require out-of-state corporations to use the standard calculation to determine the percentage of income taxable in California.

The biggest opponent of this provision is Walt Disney Co. It would pay much less California tax because its sales are worldwide, though most employees are in California. Some corporations might decide where to locate its good jobs based on state tax laws. Small businesses will be unaffected. This is a gift to large corporations.

Recommendation: Since the Green Party believes that our economy should be based on local businesses, I recommend supporting this provision (to re-close the loophole).

Overall, I recommend supporting Prop 24, which closes some newly-enacted tax loopholes.