California Voters Weigh $1 Billion Tax Break for Business

California lawmakers couldn’t bring themselves to end a $1 billion tax break for General Motors Co. (GM), Kimberly-Clark Corp. (KMB) and other multistate businesses, so now voters will decide.

If Proposition 39 is approved, as at least one recent poll suggests, corporations based outside California would lose an option that let some pay lower income taxes than those in-state.

California, the most populous and most indebted state, has cut spending on schools and the poor to help erase a $15.7 billion deficit. Governor Jerry Brown is asking voters in November for higher sales and income taxes.

“Special interests will block any attempt to close this loophole through the Legislature,” said Assembly Speaker John Perez, a Los Angeles Democrat who championed an effort to repeal the tax break that died in the Senate Aug. 31. “It is up to the voters to approve this measure to make California businesses competitive and create jobs.”

Leading the fight for passage of the ballot measure is billionaire hedge-fund manager Thomas Steyer, the chairman of Farallon Capital Management LLC in San Francisco, who has donated $21.9 million to the effort, according to campaign- finance records.

The nonpartisan Legislative Analyst’s Office estimates that adopting the so-called single-sales factor tax formula would yield $1 billion a year in additional revenue. Perez’s plan earmarked the money for college scholarships. Under Steyer’s proposition, half would go toward general spending and half to energy-efficiency projects.

Tax Rules

California requires businesses in agriculture, mining and banking to base their corporate taxes equally on payroll, property and sales, according to the state Finance Department. Other companies may choose to base their taxes 100 percent on sales, or a formula that’s 50 percent in-state sales, 25 percent property and 25 percent on other sales.

The rules were put in place as part of a deal Governor Arnold Schwarzenegger struck with fellow Republicans in 2009 in return for their support of a tax increase to help eliminate a $35 billion deficit.

Corporate income taxes are the third-largest revenue source for California’s general fund, yielding $9.6 billion in 2010-2011, the legislative analyst said.

Perez’s legislative bid to repeal the optional tax formula attracted support from unions including the California Teachers Association and from one corporation, San Diego-based Qualcomm Inc. (QCOM), according to a legislative analysis.

‘Tax Fairness’

“It’s a question of tax fairness,” Steyer, the co- chairman of Yes on 39, said in a blog post. “This corporate loophole only helps out-of-state companies. Nobody else. It saves them just over a billion dollars per year in taxes. On top of that, it is powerful incentive for them not to hire Californians.”

Opponents include companies that have benefited from the choice such as GM in Detroit, Dallas-based Kimberly-Clark, the maker of personal-care products; Chrysler Group, the automaker based in Auburn Hills, Michigan, and Memphis, Tennessee-based International Paper Co. (IP)

Spokesmen for each of the companies declined to give information about their tax liabilities in California or how they would change if the optional tax formula were repealed. They referred questions to Peter DeMarco, the Sacramento-based spokesman for their lobbying group, California Employers Against Higher Taxes.

Proposition’s Implications

DeMarco declined to comment on the tax implications of the change on individual companies, saying it was proprietary information. H.D. Palmer, a spokesman for the Finance Department, said state officials wouldn’t release the information for the same reason.

Qualcomm hasn’t taken a position on Proposition 39, spokeswoman Christie Thoene said by e-mail. The campaign for the measure lists several smaller companies as backers on its website, such as Atlas Project Support, a consultancy based in Bonsall, California, that advises developers on energy efficiency. The company’s founder, Michael Vargas, said the ballot measure’s promise of as much as $500 million a year to help curb energy use could be good for his three-employee firm.

“People are more interested in the energy space than ever before,” Vargas said by telephone.

Opponents haven’t set up a formal political committee to fight the measure, according to secretary of state records.

Additional Cost

The tax change would amount to a $1 billion a year in additional cost for businesses while the state is struggling with the nation’s third-highest unemployment rate, said Dorothy Rothrock, vice president of the California Manufacturers and Technology Association.

The Golden State’s business climate is already seen as difficult because of environmental laws and sales taxes on manufacturing equipment, she said by telephone.

“If this is something to ostensibly benefit the economy in California, why aren’t businesses supporting it?” Rothrock said. “There’s no benefits. There’s only harm.”

Proposition 39 had the support of 57 percent of likely voters in an online poll released last week by the California Business Roundtable and Pepperdine University School of Public Policy. About 29 percent opposed the measure. The poll of 802 people was conducted Sept. 9-12 and had a margin of error of plus or minus 3.5 percentage points.

The proposition will face “strong headwinds” as opponents play up their economic arguments, said Bob Stern, president of the nonpartisan Center for Governmental Studies in Los Angeles.

“When a measure is complicated and voters aren’t sure, they tend to vote no,” Stern said.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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