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California Bid to End Business Tax Break Falls Short

A California bill that would have stripped out-of-state corporations of an option for lowering their state income taxes was defeated in the closing hours of the Legislature’s term.

The measure would have required all corporations to base the tax solely on in-state sales, rather than a formula that let some pay less by factoring in their property and workforce in California. It failed in the Senate by a vote of 22-15.

Revenue from the bill, which would have raised $1.2 billion next year and $950 million in each of the following two years, was to have been earmarked for university scholarships to aid students whose families earn less than $150,000 a year.

California taxpayers will get a chance to vote on the so-called single sales factor in November in a ballot measure financed by San Francisco hedge-fund executive Thomas Steyer.

Steyer, chairman of Farallon Capital Management LLC, has put $21.9 million into an initiative to eliminate the tax break. His proposal would earmark half of the revenue for the state’s general fund and half for energy-efficiency programs.

Under current law, businesses engaged in agriculture, mining and banking must base their corporate taxes equally on payroll, property and sales in California, according to the state Finance Department. Other companies may choose between a formula in which 50 percent of taxes are based on California sales and 25 percent are based on property and 25 percent on other sales, and one in which 100 percent is based on sales.

The rule was put in place as part of a deal Governor Arnold Schwarzenegger struck with fellow Republicans in 2009 to get them to agree to raise taxes to help erase a $35 billion deficit.

Since then, Democrats have sought to reverse the agreement. While the party holds a majority of legislative seats, Democrats fall short of the two-thirds vote required for tax increases.

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