Prop. 39 Seeks to Close $1B Tax Loophole for Multi-State Corporations

While two tax-related state propositions on the Nov. 6 ballot have garnered plenty of controversy so far, a third tax-related proposition, which seeks to end a corporate tax loophole and raise $1 billion, largely has gone under the radar.

Proposition 39 dates back to a grueling late-night legislative session in 2009 when then-Gov. Arnold Schwarzenegger and sleepy legislators drafted a four-year tax increase that included an incentive for out-of-state corporations to not build facilities or hire employees in California. 

If approved, Prop. 39 would end those incentives, raise $1 billion annually and tax multi-state corporations selling products in California.

It would funnel around half of the new revenue to the state’s general fund to pay for things including education. The other half of the revenue ($550 million) would go toward stimulating the green economy for five years. When the five years are over, that money will revert to the general fund. 

“The more that voters learn about Prop 39, the more they support it,” said Alexa Bluth, spokesperson for the Yes on 39 campaign. “Although it seems complicated, it’s very simple. It’s very important to close this loophole and bring this money back to California.”

But will Prop. 39 pass?

It’s one of the tax proposals on the November ballot that seems to have a chance, even though recent polls have shown there’s barely a majority of registered voters in favor. 

The biggest road block for Prop. 39 isn’t a well-funded opposition campaign. It appears to be ignorance. The Bay Area News Group referred to the measure as the tax hike on the November ballot that “many Californians still haven’t heard a word about.”

And although the Yes on 39 campaign is running TV ads throughout the state (one is attached at right), the proposition likely will remain under the radar between now and Nov. 6.

That's because the major corporations who were prepared to fight Prop. 39 recently announced a change in their plans. 

General Motors, Chrysler, Kimberly–Clark, International Paper and Procter & Gamble all decided to not spend heavily to fight Prop. 39, which is funded by billionaire investor and environmental activist Tom Steyer. Steyer has pumped nearly $22 million of his own wealth into the Yes on 39 campaign, which included a full-page newspaper ad featuring mug shots of the CEOS of some of those companies, referred to in the ad as "the big four tax dodgers."

Bluth said many of those companies lobbied in favor of similar loophole-closing legislation in the states where they are located.

“They realized what they were up against in this campaign – we showed the hypocrisy of them coming to California to oppose this proposition,” she said. “They did the right thing by standing down.”

That doesn't mean Prop. 39 has no opposition. 

Jack Stewart, president of the California Manufacturers & Technology Association and one the proposition’s main opponents, argues that there are no “out-of-state” companies.

"Prop. 39 is a billion dollar tax increase on California manufacturers,” Stewart told Patch. “Proponents want you to think it is a tax increase that will do no harm because it only applies to out-of-state corporations, but many manufacturers with facilities and employees in California will get hit with up to 50 percent increases in corporate income tax.”

He said multistate corporations already do much to support the state and voting against Prop. 39 will save middle class jobs. “[Multistate corporations] pay billions of dollars to California suppliers and government agencies for goods and services. They are meaningful and active partners in the state's economy. We need more of them.”

Prop. 39 has garnered support from newspaper editorial pages across the state, with the primary op-ed argument against it faulting its decision to specifically direct half the revenue to alternative energy projects, a move referred to as "ballot-box budgeting."

Bluth said that's a fair concern.

“That was something that we were really sensitive to,” Bluth said. “But we wanted to make sure that some of this money, which all goes into the general fund after five years, makes some smart investments that will pay back in the long term.”

Bluth said the campaign is spending the final two weeks before the election differentiating Prop. 39 from Prop. 30 and 38, which would both raise taxes to support public education, but in different ways.

“Those two are getting so much attention and so much of it is negative,” Bluth said. “This is not a tax on individuals. We are not competing with those propositions.”

PROP. 39 BREAKDOWN – WHAT WOULD IT DO?

Prop. 39 will require multi-state businesses to calculate their California income tax liability solely based on the percentage of their California sales. Those companies can currently choose one of two ways their California taxable income is determined:

• Based on the location of their sales, property and employees
• Based on only the location of the company’s sales

Multi-state corporation taxes are California’s third largest general fund revenue source, according to the California attorney general proposition summary in the officer voter information guide. Prop. 39 won’t affect businesses that only operate in California.

FROM THE OFFICIAL VOTER INFORMATION GUIDE

Arguments in favor of Prop. 39:

• Closes an “unfair tax loophole” that lets out-of-state corporations avoid taxes by keeping jobs out of California
• Provides $1 billion to California for job creating energy efficiency projects and to schools

Arguments against Prop. 39:

• It’ a “massive $1 billion tax increase on California job creators that employ tens of thousands of middle class workers.”
• It’s a “recipe for waste and corruption, giving Sacramento politicians a blank check to spend billions without real accountability.”

How do you feel about Prop. 39? Are you going to vote for it in November? Tell us below in the comments!

For more about the state ballot propositions and local Napa County measures, please see:

• Napa County Letter: All-Ages Ballot Workshop Oct. 29
• State Propositions and Local Measures Presentations Nov. 2
• Propositions 34 and 36 Would Make Major Changes to Punishment for Serious Crimes
• Battle Over Prop. 34 Death Penalty Ban Heats Up
• Prop. 37: Should Genetically Modified Food Be Labeled?
• Sing Along to the 'Proposition Song!'

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