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Government: Jerry Brown's corporate tax shuffle

August 25, 2011 |  4:13 pm

California Gov. Jerry Brown 
Thanks to an ill-conceived provision in a 2009 budget deal, California gave a billion-dollar tax break this year to corporations that do business in multiple states. Gov. Jerry Brown proposed in January to eliminate the tax break as a way to narrow the state's budget gap, only to be blocked by GOP lawmakers. On Thursday he tried again, proposing to trade the one large break for several smaller ones tied to hiring and equipment purchases. It's a good idea in theory, but there are at least two problems in practice.

The billion-dollar break allows most multistate businesses to calculate their tax liability in either of two ways: based on the percentage of their sales earned in California, or based on the percentage of their sales, employees and investments in the state. The former approach rewards companies that locate their headquarters and other major facilities here; the latter rewards those that don't.

Back in the 1950s states settled on the latter approach as a national standard. In recent decades, though, an increasing number have shifted to calculating tax liability based solely on in-state sales in the hope of luring more headquarters and investment. California is a rarity in giving companies the choice, encouraging companies to put their dollars to work elsewhere. It is, as The Times' editorial board put it in March, "harebrained and counterproductive."

That's why Brown wants to require multistate businesses to use the in-state sales formula. On Thursday, he proposed spending the $1 billion that would be raised on three other corporate tax breaks. Two of them are good ideas: waiving the state's portion of the sales tax on manufacturing equipment (just shy of 4%) for start-ups in their first three years, and slashing the tax for other businesses to a little less than 1%. Start-ups are a crucial source of new jobs, so it would be even better if Brown waived the sales taxes they paid for any type of business equipment. But a break just for manufacturers would still be welcome.

Brown's other proposal would expand a temporary benefit for growing small businesses, offering a larger tax credit ($4,000 instead of $3,000) for each new hire and making companies with up to 50 employees eligible (instead of a maximum of 20). But some economists have questioned the efficacy of such credits, saying they tend to reward businesses that were going to expand even without a tax break. The fact that the break would expire in 2013 is problematic too. If a company can't afford to hire an extra worker without the tax break today, what are the chances that it won't need the state's help to keep the worker on its payroll three years from now, considering how slowly the economy is improving?

Such considerations may be moot. Brown's proposal won't go anywhere unless at least two Republicans in each chamber are willing to support it, and a top Republican in the Senate pooh-poohed the plan Thursday even before Brown unveiled it.


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-- Jon Healey

Credit:  Eric Paul Zamora /Fresno Bee

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