Numerous propositions are on the California ballot this year, but perhaps the one that’s garnered the most attention is Proposition 39. This is with good reason, as it’s rare to have a tax that will gather 1 billion dollars annually from nothing but large corporations, let alone ones that vow to apply 550 million of that to green energy. What’s gathering the most attention is that rather than applying a tax the proposition simply proposes the closing of a tax loophole. But just what is this loophole?
It all started in 2009 when state legislators approved a budget plan that included a choice for how companies paid their taxes. There were two choices a company could take. There was the “single-sales factor” method that measured nothing but sales, and the more complicated “three-factor” method” that took into account sales, employees and property. Though providing a choice is rarely a bad thing, in this case there was a major problem. The three-factor method could only tax on employees and property within California. As such, companies without holdings in California that still sold their products there could save a great deal of money by choosing the three-factor method, resulting in a loss of 1 billion in tax a year.
In substantial ways, Prop 39 fixes California’s loopy tax loophole. There has been a bit of haggling over whether it’s really just another tax hike, but since it targets only corporations with holdings out of state those criticisms are in the minority. What has been gathering more attention is the bills vow to apply 550 million to further green energy and creating jobs in the green energy field. This has been given great praise and great opposition both. On the one hand, green energy is certainly worth investing in, and creating jobs is never a bad thing. Inversely, many believe that the 550 million would be better applied somewhere else such as education or building state infrastructure. Either way, there have been relatively few criticisms on the intent of the proposition of ending the tax loophole.
Whether this loophole was a mistake or an attempt to promote the economy by being forgiving on large corporations, it has failed. Closing it is best both for the added money coming into the state coffers and to cease promoting companies to take their facilities out of state.
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