The business of taxes

Business groups routinely complain about California’s tax rate, arguing that it’s driving many ventures out of the state. As The Times reported Sunday, however, the reality is more complex. California is a high-tax state for some businesses, particularly smaller ones. Yet thanks to tax incentives and loopholes, the average California business pays no more in state and local taxes than the average company does nationwide. It seems that taxes are like commerce in one important respect: Only suckers pay retail rates.

The latest annual report by the Council on State Taxation found that the taxes collected from California companies amounted to 4.7% of the value of goods and services produced by the state’s private sector. Twenty-six states had higher tax burdens, including such supposedly business-friendly destinations as Texas and Nevada (both at 4.9%).

True, California’s corporate income tax rate is higher than most across the country. But that’s offset — for many companies, at least — by comparatively low property taxes, a large tax credit for research and development, and a state tax code that incorporates many of the incentives that Congress has given business. These factors tend to help big businesses, particularly those with operations in multiple states or countries that can shift revenue away from California to regions with more forgiving tax policies.


Just look at Google, the state’s second most valuable company (as measured by the stock market). Rather than paying taxes in California on its overseas sales, the company attributes nearly 90% of that revenue to a subsidiary in Ireland, which avoids taxes there by transferring its profits to a tax shelter in Bermuda, Bloomberg Businessweek reported.

Federal and state lawmakers may not be able to stop that kind of accounting legerdemain, but they can winnow the deductions, credits and other types of tax breaks that favor specific kinds of businesses. The byzantine complexity of the tax code encourages gamesmanship at the expense of fairness. It would be better for Sacramento and Washington to lower the corporate rate but spread the burden more broadly, applying the tax burden more evenly among businesses.

Congress made this kind of tradeoff in the 1986 Tax Reform Act, but lawmakers have been adding tax breaks for specific industries and types of investment ever since. And as a result of a budget deal struck in 2008, California is slated to provide large corporations yet another break next year that their smaller competitors probably can’t use: the ability to transfer tax credits from one subsidiary to another, more profitable one. Rather than making the state more hospitable just to big businesses, lawmakers should try to make it more welcoming, and more fair, to all of them.