By Ken Jackson
Why CMTA opposes Proposition 39
Prop 39 is a $1 billion tax increase on California manufacturers.
Multistate Tax Policy change: Proposition 39 would eliminate the three-factor apportionment formula that has been a part of California law since 1966 and instead impose a single sales factor (SSF) calculation on all multistate businesses. In 1966, California adopted an equally weighted, three-factor apportionment formula for taxing multistate businesses – payroll, property and sales. In 1974, California joined an interstate compact adopting this formula. The compact requires that participating states offer the three-factor formula, but allows states to offer an alternative apportionment formula, so long as the taxpayer can elect which formula to apply. In 1993, the Legislature amended the three-factor apportionment formula by giving double weight to the sales factor. In 2009, the Legislature retained the revised three-factor apportionment formula (double weight on sales) but provided an alternative SSF apportionment formula that allows multistate businesses to apportion income to California using only their percentage of sales in California.
The 2009 deal and “loopholes” The proponents argue that Prop 39 “repeals a shady backroom legislative deal enacted in 2009” that created a tax “loophole” for “out-of-state” companies. That is false and misleading. In fact, Prop 39 would repeal a method for income apportionment based on three factors acknowledged by California and most other states as a legitimate way to apportion income for tax purposes. The bi-partisan agreement in February 2009 allowed use of SSF to help stimulate investment and hiring in the state for the companies who might otherwise invest elsewhere. At that time the Legislature rightfully allowed for the method to be elective in nature, allowing the longstanding method to be used by employers for which SSF is actually a disincentive to invest. By moving to mandatory SSF, Prop 39 punishes taxpayers who neither sought SSF nor ever planned to use it. According to prop 39 proponents (Lenny Goldberg) the ability to change back and forth on a yearly basis, not the formula itself, is the supposed “loophole”. That is something that could easily be fixed, and it’s not what Prop 39 does. The arguments in the ballot statement are misleading to voters.
California's enormous consumer market makes mandatory SSF a bad idea in this state versus other states. California is the world’s 9th largest economy with 37 million citizens. A multistate company with a fair amount of plant and equipment in California but a huge sales volume will be penalized by SSF, while the same company with the same level of plant and equipment in a mid-western state (having much lower sales) would be benefited from SSF. The companies benefited by SSF in California tend to have centralized property and payroll here and products that can be more cost-effectively transported around the world, such as compact, high-margin products like software and pharmaceutical products. On the other hand, California employers harmed by SSF here produce bulkier consumer products that are better produced in various locations around the globe in closer proximity to their customers. Imposing SSF on them will not encourage more in-state investment – it's simply a huge tax increase – up to 50% - more that must be absorbed in the workplace or passed along to consumers. Nothing justifies this increase – they are imposing no additional burden on government services, nor will they be able to avoid the tax increase through reasonable in-state investments and/or hiring.
Prop 39 will actually hurt jobs, it won’t create jobs. For a number of our members, who employ thousands of Californians and contribute billions of dollars to the state's economy, a mandatory SSF is a $1.2 billion tax increase that will hurt California jobs and investment. These are not “out-of-state” companies as the proponents like to say. Their California plants and offices employ more than 4,500 Californians in good-paying union and non-union jobs. In 2011 they paid nearly $1.5 billion to other California companies and government agencies for goods and services. They are meaningful and active partners in the California economy. Maintaining their ability to keep the longstanding three-factor apportionment formula or choose SSF will encourage new investment and employment in California while protecting taxpayers who stay with the longstanding formula.
Mandating SSF will NOT spur economic development and job growth in California. In 2009 certain companies asked for SSF to lower their taxes and encourage them to grow in the state. SSF was made elective to ensure that the tax cut for those companies wouldn't be offset by a harmful tax increase for other companies. To now mandate SSF would provide no further incentive to those companies using SSF (they already have it!) but simply inflicts a $1.2 billion tax increase on others, hurting the competitiveness of their California operations. Proponents say that 40,000 jobs will be created. That is based on a Legislative Analyst Office report that measured the impact of going from three factor directly to mandatory SSF. Since we already have SSF available in California, the move to mandatory SSF won’t have the same job impact. It’s dishonest to refer to that study in support of prop 39.
Comparison with other states – Why companies choose or don’t choose California. There are many reasons why a company may choose to locate in California or other states. The fact that we do not have mandatory SSF is NOT one of them. Workers compensation, litigation, permitting problems, imposition of sales tax on manufacturing equipment purchases, high taxes generally – these are the things we need to work on to attract jobs and investment. Fifteen states have moved toward SSF, hardly a majority. And if we want to be like Texas, there are many other tax and regulatory issues to include on the list to change. Current California law already imposes a tax burden on companies that ranks the state 48th (2012 Tax Foundation Business Tax Climate Index) and measures sales as 50% of the income calculation (double weight). Mandating SSF magnifies the uncertainty and unpredictability of the tax climate in the state. This will further erode California’s ability to attract and compete with other states for business investment and hiring. Proponents call companies opposing AB 1500 “tax dodgers” and hypocrites. They cite positions taken in other states. But in NJ, the change to mandatory from 3 factor formula was a net tax revenue DECREASE, and it was accompanied by other reforms. We can’t compare California to other states. There is a different story in each case, for each company.
Use of the revenue: California is suffering from an ongoing state budget deficit that lawmakers have been unable to resolve. State tax increases, if necessary, should be for purposes identified by our elected officials based on priorities important to California citizens. Prop 39 devotes half of the tax increase for a new bureaucracy to fund various environmental purposes without showing any need. In fact, Californian’s have been paying billions of dollars, and will spend billions more, through their utility bills and at the gas pump for programs to address energy efficiency, climate change and clean the environment. Giving another $500 million per year for this purpose and creating a new government bureaucracy when public safety, schools, and low-income programs are competing for budget resources does not make any sense. ----------------------------------
Why CMTA Opposes Proposition 37
Proposition 37 would ban the sale of tens of thousands of perfectly-safe, common grocery products only in California unless they are specially repackaged, relabeled or made with higher cost ingredients. Prop 37 is a deceptive, deeply flawed food labeling scheme that would add more government bureaucracy and taxpayer costs, create new frivolous lawsuits, and increase food costs by billions — without providing any health or safety benefits. That’s why Prop 37 is opposed by a broad coalition of family farmers, scientists, doctors, business, labor, taxpayers and consumers.
Conflicts with science
More bureaucracy and taxpayer costs
Higher food costs