Corporate tax change will encourage companies to grow in California
A key component of the state budget approved last week was a long-needed and much-debated reform that will allow California to compete for jobs and investment against 21 other states that have adopted the "single sales factor" apportionment method for corporate taxes. For too long, California held on to a tax policy that rewarded companies for moving jobs elsewhere. We have paid the price as homegrown companies shifted jobs and operations to other states that utilize this method.
Until now, California's corporate tax has been figured on a combination of sales, payroll and facilities in the state, meaning that adding jobs and facilities increased a company's California tax bill. Worse, companies could decrease their California tax by moving payroll and property out of state. Shifting to a corporate tax based only on sales, the "single sales factor," reverses those incentives to benefit California.
In a Feb. 18 editorial, the Mercury News expressed support for California's adoption of the single sales factor method, but criticized the absence of thresholds of investment that a company would have to make before qualifying for the new incentive.
This criticism, however, misses the mark. Though such provisions were debated as part of legislation that I authored in 2007, the proposal approved on a bipartisan vote last week represents a more robust economic development strategy that responds to current economic conditions.
The economy is in shambles, and California is bleeding jobs. According to the Economic Development Department, California lost 257,400 jobs from December 2007 to December 2008 and lost more than 78,000 jobs in December alone. Announcements by major employers in 2009 indicate that this trend will worsen.
Taking a baby step, by limiting tax reform to companies in a position to grow their operations by $250 million in a year's time, as was proposed previously, would severely limit the effectiveness of the incentive. Such limits ignore industries with the greatest promise to lead California out of this recession. In green technology and biotechnology, California has a few large companies and many small but growing companies that we want to keep in state. These startups won't grow by $250 million in a single year. We can't afford to lose them, as they look to expand manufacturing or research, to the 21 other states that do not require minimum investments.
Critics point to an estimated decline in state revenue. But they are looking at only at one side of the ledger, in effect telling us only how revenue might be reduced. The state has not evaluated the dynamic impacts, as companies respond to good incentives, from this reform.
More jobs bring additional personal income, sales and property taxes to California. It's common sense. We know the experience of New York, which accelerated its phase-in of this reform because of the benefits being generated for the state. We know that our neighbors Oregon and Arizona are enjoying billions of dollars in new investment and associated jobs from California companies. Arizona changed its corporate tax structure to lure a multibillion-dollar investment by Intel. Intel also recently announced an investment of nearly $1.5 billion in Oregon, a single-sales factor state.
The shift to single-sales factor was supported by leaders of both parties in the Legislature. Its inclusion in this budget is the culmination of thorough discussions, not a last-minute maneuver.
California is faced with a choice: Keep providing companies incentives to expand elsewhere and accept the job loss and decline in tax revenue, or increase our ability to compete by providing an economic incentive for them to grow in California.
Fiona Ma represents the 12th Assembly District serving San Francisco and Daly City. She serves as the Assembly Majority Whip and as a member of the Revenue and Taxation Committee. She wrote this article for the Mercury News.