Prop. 39 would recoup $1 billion California lost in tax breaks

SACRAMENTO — At the heart of Proposition 39 is a way to recoup $1 billion the state gave up in tax breaks for Silicon Valley companies and other big California corporations as part of a back-room deal.

But the measure isn’t aimed at those businesses.

A late-night pact three years ago allowed firms to choose between two ways of computing their state income tax. Not surprisingly, they have opted for the lower result. Proposition 39 would eliminate that choice, taxing all businesses with a single formula and returning $1 billion to the state.

“This is a loophole that really shouldn’t be there,” Tom Steyer, a San Francisco Bay Area hedge fund manager who has bankrolled the campaign with nearly $22 million of his personal fortune, said at a talk in Sacramento last month.

The $1 billion, which would help balance the budget and pay for a new green-energy program, won’t come from the businesses that won the tax advantage; those companies would keep the money. Under Proposition 39, out-of-state businesses that make such everyday products as cars, tissues and hair conditioner would pay more.

“These are not the companies that saw their tax bills plummet,” said Dorothy Rothrock, vice president for government affairs at the California Manufacturers and Technology Assn., which opposes Proposition 39.


The state used to tax all business income using a combination of California property, workforce and sales. That meant firms based in California, with significant in-state property and employee rolls, paid more than corporations whose assets were elsewhere — and thus leavened their tax bills.

In 2009, a group led by high-tech companies including Genentech, Cisco and Apple asked the Legislature for new rules that would tax sales alone, lowering their own liability and increasing that of companies based elsewhere. But lawmakers were scrambling toward a budget deal and, according to legislative staff and lobbyists, reluctant to raise levies on such businesses as General Motors, Kimberly-Clark and Procter & Gamble.

So they simply adopted the new rules in addition to the old formula and gave companies a choice.

The tech companies’ move was part of a national lobbying effort to lower the taxes they pay. They have threatened to lay off workers in many states where they have operations unless a different income tax formula were adopted. Additionally, they have been pushing Congress for other more lenient tax rules.

A company’s taxes are confidential. But the state released data showing that nearly a third of the 2009 tax break was shared by nine companies, which each received savings averaging $33.1 million. Joining Silicon Valley in lobbying for the change were some Hollywood studios with large California assets.

The campaign for Proposition 39, however, gives the impression in advertisements and news releases that out-of-state firms got the windfall. One release said non-California firms persuaded lawmakers in 2009 to give “tax breaks to companies who ship jobs out of state.”

Economists differ on the fairness of taxing all businesses on sales alone. Some argue that it encourages companies to hire and expand in California, because a bigger workforce would no longer result in a bigger tax bill. Others say the method enables firms to avoid paying for the roads, universities and other state services they use and note that some tax-avoidance schemes, such as the shifting of income into shell companies, have followed.

Even some key supporters of Proposition 39 apparently doubt that locking in the 2009 tax breaks would help California’s economy. Unions and tax experts now working with Steyer had campaigned for an earlier ballot measure to force all companies back to the old, three-factor tax. That measure failed in 2010 amid intense, well-funded opposition from the tech companies and studios that would not be affected by Proposition 39.

Under Proposition 39, $500 million raised by the measure would go to a new Clean Energy Job Creation Fund, paying for energy-efficiency retrofits in public buildings and providing loans for other efficiency projects. The remaining money would go to the state’s general fund. After five years, all the money would go to the general fund.

Steyer’s firm, Farallon Capital Management, has millions of dollars invested in alternative-energy projects. Steyer has said he would not benefit financially if Proposition 39 passes.

“I cannot think of a way this is going to help me,” he said. “The only people who are going to make money out of this are the people who do construction, which I have no interest in, and the people who are going to be supplying the well-known technologies … to retrofit these buildings, which I have no interest in.”