While budget negotiations remain under the cone of silence, there are increasing signs that the as-yet-to-be-agreed-upon or announced deal may include a massive tax cut for the state’s largest and most profitable corporations. There are signs that lawmakers may include a change to the formula corporations use to determine how much of their income is subject to taxation in California in the budget deal. Since details of changes under consideration have not been made public, it is unclear whether lawmakers are considering a proposal that would let corporations choose one of two methods for apportioning income to California or a version that would require all corporations to use the same formula. The first option could result in a multi-billion dollar per year revenue loss, while the latter could result in an annual loss in the range of $700 million to $1 billion.
Several measures containing the “have it your way” approach have been introduced in recent years, most recently in the “dead of night” tax deal passed by the Assembly as part of budget negotiations in 2007, but later blocked by the State Senate. Assemblymember Fiona Ma authored AB 1591 in 2007 and AB 2114 in 2008 that would have codified this approach, as did AB 1037 (Frommer) of 2005. At full implementation, AB 2114 would have reduced corporate tax revenues by $3.0 billion according to estimates prepared by the Franchise Tax Board. A 2006 CBP analysis reviews the policy issues raised by this approach.
The inclusion of a massive tax break as part of a budget deal aimed at closing a $40 billion budget shortfall raises obvious questions. First: how would the lost revenues be paid for? Long-term budget forecasts published by the Department of Finance and Legislative Analyst show the state facing red ink as far as the eye can see; thus, any tax cut would dig the state into an even deeper hole in the future. A second question is whether large corporations deserve another tax break on top of the billion a year cut included as part of the 2008-09 budget package. Last, but not least, is whether the proposed tax break would be the best use of hundreds of millions to billions of dollars at a time when deep cuts are proposed to public education, programs for the elderly and people with disabilities, public transit, and virtually every other area of state spending. Our guess is that in a fair and open debate, the answer would be a resounding no. And that’s why this proposal deserves a little sunshine.
— Jean Ross