Voters will confront two competing and high-profile initiatives in November that would raise the state's personal income tax to reverse some of the cuts that have been made to schools and other programs. Further down the ballot is another, less heralded proposal that would remove a tax break that mainly benefits multistate companies based outside of California. That measure, Proposition 39, would raise an estimated $1 billion a year, about half of which would be dedicated temporarily to making public buildings more energy efficient. Although it is the Legislature's job to solve problems like this one in the tax code, Sacramento has proved time and again that it's unable to do so. And this problem cries out for a solution.
Until last year, multistate companies calculated their taxable income in California by considering three factors: their sales, employment and property within the state's borders. That formula had been common among states, but in recent years some have changed to a much simpler one: taxing companies based solely on their in-state sales. Unlike the three-factor formula, the "single sales factor" approach doesn't raise a company's taxes if it adds employees or builds new factories in the state. In fact, it encourages companies to move employees and property out of states that still tax them. As a result, the states that made the switch had a competitive advantage when it came to attracting new plants and businesses with growing payrolls.
California was poised to follow suit, but lawmakers took a different course during last-minute backroom haggling over a budget deal in 2009: They let companies use whichever approach costs them less. The change, which amounted to a billion-dollar tax break for some multistate companies, evidently was intended to secure their support for temporary increases in the sales, vehicle and personal income taxes. But it was a "heads I win, tails you lose" change as far as multistate corporations were concerned, giving businesses that benefited from the three-factor test no incentive to add jobs or investments in California.