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California Prop 39 Multistate Businesses, Clean Energy

by Bob Morris, published

Businesses operating in both California and elsewhere can currently choose two ways of determining taxable California income, the three-factor method or the single sales factor method. California Prop 39 would require multistate businesses to use the single sales factor method only, generating an additional $1 billion in revenue for the state. The three-factor method calculates taxes based on sales, property, or employees in California. The single sales factor method calculates solely on percentage of sales in California. Under the current options, multistate corporations have the opportunity to pay less state income tax than companies based solely in California.

While there aren't a large number of multistate corporations, their taxes are an important part of California's revenue and accounted for $9.6 billion in 2010-2012. Some of the expected $1 billion in additional revenue would be used for alternative energy, energy efficiency projects, and for funding education.

Proposition 39

  • Requires multistate businesses to calculate their California income tax liability based on the percentage of their sales in California.
  • Repeals the existing law that gives multistate businesses an option to choose a tax liability formula that provides favorable tax treatment for businesses with property and payroll outside California.
  • Dedicates $550 million annually for five years from anticipated increase in revenue for the purpose of funding projects that create energy efficiency and clean energy jobs in California.

The Yes on 39 campaign says:

An outrageous tax loophole allows out-of-state corporations to pay lower taxes in California, costing our state a billion dollars a year. This loophole actually rewards companies for creating jobs outside of California. Proposition 39 closes this loophole by forcing out-of-state corporations to pay their fair share, bringing in much-needed state revenue that will be invested in clean energy and energy efficiency projects, create good-paying jobs, and help fund our schools. Join us. Let’s close this corporate tax loophole and create new clean energy jobs in California

The No on 39 campaign website listed in the official state summary for Prop 39 has no information except for a screen saying "Under construction." The official rebuttal in the state summary says:

Proposition 39 is a massive $1 billion tax increase on California job creators that will result in the loss of thousands of middle class jobs. California's unemployment rate is already third worst in the country at nearly 11%. Prop. 39 makes our problems worse. Proposition 39 is a recipe for waste and corruption. Prop. 39 is politics at its worst. California needs reform, not more taxes and wasteful spending. We must vote no.

Proposition 39 is one of those arcane propositions that appear on the ballot occasionally. It deals with a narrow, complex issue and requires thorough thought and study to determine the potential outcomes of its passage.

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