Exemptions Pinch Corporate Income Taxes in California

California’s corporate income taxes will provide about 8 percent of general-fund revenue this year, half as much as in the 1950s and 1960s, according to the state’s nonpartisan Legislative Analyst’s Office.

Corporate taxes, the third-largest source of revenue for the most-populous state, have become both more volatile and less important as new laws carved out exemptions over the past three decades, analyst Mac Taylor said March 12 in a letter to state Senator Mark Leno. The San Francisco Democrat requested the review in his capacity as chairman of the Senate Budget and Fiscal Review Committee.

California law was changed in 1985 to allow corporations to choose whether to report income from worldwide operations or only those in the U.S. Beginning in 1987, businesses could take a pretax deduction on a portion of net operating losses from the previous five years, Taylor said. California later recognized subchapter S corporations, taxed at a lower rate than general corporations, and allowed businesses to claim tax credits for expenses such as research and development or for a location in an enterprise zone.

Personal income taxes make up about two-thirds of general-fund revenue, replacing sales and use taxes as the state’s primary source, Taylor said.

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