Ever since a 2009 budget compromise changed how corporations calculate their taxes, business advocates and Democrats have feuded in the Capitol over tightening that law.
Gov. Jerry Brown and Assembly Speaker John A. Pérez have led the charge, motivated by the $1 billion the state would realize from the change and a belief that corporations won a loophole in the 2009 deal thanks to Republican demands.
The 2009 deal with the GOP added an option for multistate businesses to calculate their tax bill based solely on the share of sales they have in California. Companies based in California argued they were previously penalized for housing their operations here because their taxes were higher the more buildings they owned and employees they hired. The 2009 change allowed them to expand properties and payroll without any impact on their state income taxes.
But the 2009 law also let companies choose the previous formula if that was more beneficial to them, which is the case generally for out-of-state firms that have relatively few buildings and employees in California but plenty of sales. These include Detroit-based car manufacturers and North Carolina-based tobacco companies.
Requiring such firms to base their tax rate on sales volume in the most populous U.S. state would increase their tax bill. The same would go for biotechnology firms such as New York-based Bristol-Myers Squibb, which would face a greater disadvantage against California-based competitors. California biotechnology firms have pushed to change the law and increase tax rates on outside competitors.
Proposition 39 is the latest effort to tighten the 2009 law. This time it comes with major financial firepower from billionaire Thomas Steyer, who made his mark with San Francisco-based hedge fund Farallon Capital Management and is a prominent Democratic donor.
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