Prop 24: Give Me Back Those Tax Breaks!

One of the ballot measures California voters will decide in November is Proposition 24, an initiative sponsored primarily by the California Teachers and other unions to deny tax breaks to companies creating jobs or expanding business in the Golden State which were part of the budget agreement hammered out in 2008 and 2009.  By trying to repeal the tax breaks through the initiative process, the unions are undermining the budget deal they agreed to with the Governor and Legislature.

The proponents of Prop 24 have contributed more than $10 million to support it most of that money coming from the California Teachers Association.  Opponents include some major Fortune 500 players including GE, Walt Disney, Genetech, CISCO, CBS, Time Warner, Viacom, HP, and others who have put up about $9.3 million to oppose the measure.

The tax breaks covered by Prop24 start in 2011 and include:

  • Loss Carry Back. Allowing businesses to shift operating losses to prior tax years when they made money so that they can apply for retroactive refunds. That break also extends the length of time a business can shift operating losses into future tax years from 10 years to 20.
  • Tax Credit Sharing. Allowing corporations to share tax credits with subsidiaries, such as their affiliated research and development companies.
  • Single Sales Factor. Imposing only California sales tax on businesses that have operations in many states. They now pay taxes on payroll, property and sales in the state.

The basis for the budget agreement on these measures was that enacting them made California tax laws more consistent with the Federal Tax Code.  Ten other states competitive with California also have credit sharing or net operating loss carry back.  At California Legislative hearings before the Revenue and Taxation Committees Andrea Jackson of Genentech testified that Genentech saved so much money by expanding in Oregon because of the single sales tax, it paid for the expansion. Jackson said Genentech wants to expand in South San Francisco, “but we needs 10-year plan they can rely on.”

California’s tax regulators estimate that about 120,000 businesses in the state would have higher taxes, if Proposition 24 is approved by voters and that the tax breaks are worth about $1.7 billion per year to the affected businesses.  The union proponents for Prop 24 contend that California’s budget deficit means the state cannot afford the tax breaks.

The newspaper editorial reaction to Prop24 has been mostly negative:

Contra Costa Times: “Reneging on promises of a few tax breaks during a protracted economic turndown would be a grave mistake in a state with one of the highest jobless rates in the nation. Voters should soundly reject Prop 24 with a no vote in November.

Sacramento Bee: “Repealing tax breaks that corporations have been expecting for two years could force them to make some grim decisions about operating in California. Those decisions could further damage the state’s crippled economy.”

Long Beach Press Telegram: “The tax law changes were essential elements in reaching budget agreements in 2008 and 2009 and should be honored. Moreover, the tax breaks come at a time when businesses and the jobs they create are needed more than ever in a state with an unemployment rate higher than 12 percent.”

Ventura County Star:  Recommended a YES vote on Prop24 but the words did not sound all that enthusiastic: “The bottom line: A new tax loophole or two won’t spur businesses to launch major investments in California; businesses do so only reluctantly because of the regulatory stranglehold in the state. And further tax cuts and loss of revenue will worsen conditions in the Golden State, making this state less appealing to those who want to live, work and do business here.”

So what?

California is engaged in a great debate about how to get its groove back.  It often seems like a zero-sum game choice, but California voters recognize that the politicians in Sacramento are not going to solve the problem.

And (EUREKA!) voters also realize we are making it worse by piling on requirement after requirement through initiatives like Prop24 that discourages new business investment and job creation in California even in the boom times and now find the Golden State running out of gold while the jobs go elsewhere in search of more competitive business conditions.

But the same union advocates for the Prop24 take back of tax breaks for business investment are unwilling to consider give backs for public employee pensions and benefit costs driving the State and its cities and schools to near bankruptcy from the looming unfunded liabilities.

The truth is California must do both to get its groove back.

It must streamline, simplify and harmonize its business regulations, tax structure and permitting processes to be, at least, competitive with other states and preferably a magnet for investment to restart economic growth.  And California must reform both its government costs structure and decision process to restore confidence that the 6th largest economy in the world does not devolve into a failed state.

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