For Prop. 39, a quiet but decisive victory


SACRAMENTO — With little fanfare this week, California voters approved a plan to close a corporate tax loophole affecting out-of-state businesses, finance $2.5 billion in clean energy and energy efficiency projects and deliver another $2.5 billion to the state’s beleaguered treasury over the next five years.

It is a tax increase of modest proportions compared with most in California, but experts say it highlighted the politics of taxation and how some business levies engender strong passion whereas others draw little public attention or electoral opposition.

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The initiative passed overwhelmingly with 60.1% of the vote. It put California’s corporate income tax on multistate businesses in line with that of in-state businesses and most other states.

“Out-of-state companies make for a pretty irresistible target,” said Dan Schnur, director of the Jesse M. Unruh Institute of Politics at USC. “Californians are generally pretty reluctant to raise taxes at the ballot box, but they are a lot more willing to raise taxes on somebody else.”

On Tuesday, those same voters rejected a tax hike to fund schools — Proposition 38 — but approved Gov. Jerry Brown’s Proposition 30, which raised income taxes on people earning more than $250,000 a year and tacked another quarter of a cent on the base sales tax of 7.25%.

Though backers of Proposition 39 spent more than $31 million on television and other advertising, their message was largely drowned out by the $119-million media barrage laid down in the fight over the two other tax initiatives as well as a failed campaign to label foods with genetically modified ingredients, Proposition 37.

Proposition 39 drew almost no public opposition — even though some of the largest multistate corporate giants, including General Motors Co., Kimberly Clark and Procter & Gamble, soon will be hit with an annual increase in state income taxes of more than $1 billion.

A campaign to support it was financed almost single-handedly with $29.6 million from hedge fund billionaire Thomas F. Steyer, founder of San Francisco-based Farallon Capital. Steyer said he wanted to ensure that companies that sell billions of dollars’ worth of cars, tissue, soaps and other consumer products pay taxes here that are calculated the same way as those on such California-based companies as Apple Inc., Google Inc. and Intel Corp.


“This was an egregious loophole that was a mistake and had to be corrected,” Steyer said. “Companies that are not California-based are now going to pay California state income taxes on their California earnings like California companies.... It’s tax fairness.”

Proposition 39 got only token opposition from the California Chamber of Commerce and trade groups. They contended that changing the tax formula would unfairly discriminate against companies that complied with California’s long-standing and often cheaper method for computing corporate taxes.

Major manufacturers, who killed a similar tax bill in the Legislature last summer, largely left the field after proponents threatened to wage a public “tax dodgers” campaign against them.

Although opponents suggested that the tax increase would drive companies out of the state, experts countered that the consumer companies, which reap billions of dollars in sales in populous California, would be unlikely to pull out of the Golden State.

“They will not stop selling here,” said Lenny Goldberg, a lobbyist for the liberal-leaning California Tax Reform Assn. “For a company like Procter & Gamble, this is a huge, huge market.”

The Franchise Tax Board, the agency that administers the state income tax, estimates that the change in calculating out-of-state corporation levies could raise annual bills for about 13,000 companies. But 70% of the revenue would come from about 4% of those firms with gross receipts of more than $1 billion each.


The change in tax law won’t affect companies that call California home. But it eliminated the ability of out-of-state companies to choose between two formulas for calculating their taxes. Now they must use criteria based only on sales. They no longer would have the option of using one that looked at sales, payrolls and property in California.

Before passage of Proposition 39, only California and Missouri allowed corporations to make such a choice. Nearly half of all states base income taxes only on a corporation’s sales.

The new corporate tax scheme will encourage companies to base more employees, offices and other facilities in California, proponents argued. It also will create as many as 40,000 jobs by investing half a billion dollars annually for five years in energy efficiency retrofits in public schools, colleges and universities and by assisting local governments to do energy-saving retrofits on buildings and residences.

Another half a billion dollars each year would go into the state general fund to pay for education and other government programs. After five years, all the tax revenue would flow into the state treasury.

The tax increases should have an “imperceptible” effect on the Golden State’s $1.7-trillion economy, said Loren Kaye, president of the California Foundation for Commerce and Education, a think tank affiliated with the state Chamber of Commerce.

But the approval of Proposition 39 bolsters charges that California is unfriendly to business, he said. It “adds to the reputation that we’ve got that every chance we can, we’re going to raise taxes on the productive part of the economy.”