In a roomful of business leaders, Governor Jerry Brown recently released a jobs-tax package that, as described by the Governor’s office, expands a jobs-credit and reduces taxes for businesses investing in manufacturing. The jobs-tax package — a three-point jobs plan — would:
1. Expand the current jobs credit by increasing the credit from $3,000 to $4,000, increasing eligibility to employers with fewer than 50 employees, placing a sunset on the credit at the end of 2013, and preventing double-dipping with the Enterprise Zone credit;
2. Provide a sales-and-use-tax exemption (SUT) for purchases of manufacturing equipment. Specifically, the proposal would include an exemption for firms in the manufacturing; biopharmaceuticals; alternative energy production such as solar, wind and tidal; and software publishing industries; and
3. Implement a mandatory Single Sales Factor (SSF) Apportionment for all multistate businesses.
A Mid-night Deal
As a result of a mid-night budget deal in 2009, the legislature threw in a legislative provision that allowed firms to select one of two tax formulas starting in the 2011 tax year: a singles-sales factor or the traditional three-factor formula. Prior to the change, corporate taxes were calculated using a three-factor formula: sales, payroll and property in California. With the change, companies had the freedom to choose whether to be taxed based solely on sales or sales, payroll and property.
At the start of 2011, a company could select the option of using either the new single-sales factor formula — calculating taxes strictly on sales in California — or the old three-factor system. Opponents of the two-option tax system argue that allowing companies to select between the two formulas penalize job creation and property ownership in California: an out-of-state company could select to be taxed using the three-factor formula and benefit if it had little payroll and property in California.
The change sparked skepticism and debate about who benefited from the new tax change. Senator Kevin de León (D-Los Angeles) introduced SB 116 — a bill backed by Brown — that would make singles-sales factor mandatory. In other words, a firm’s tax liability would be based solely on its sales in California. Proponents of the mandatory formula argue that, by eliminating the option of selecting the new or the old tax formula, companies that create jobs and own property in California would benefit from a mandatory single-sales factor.
Building off of the mandatory single-sales factor proposal, Governor Brown released his jobs-tax package that would implement a single-sales factor, expand the current job-credit, and provide a SUT for purchases of manufacturing equipment.
The Jobs-Tax Package
Governor Brown has proposed that the money saved by adopting a mandatory single-sales factor be used toward a nearly 4% state sales tax exemption for start-up manufacturers and a 3% state sales tax exemption for existing firms while providing a “massive tax reduction” for manufacturers who buy equipment by reducing the sales tax. As articulated by Brown, the current system — allowing businesses to be taxed solely based on sales or the three-factor tax scheme — encourages job flight out of California. “Any opposition defies reason,” stated Governor Brown during yesterday’s press conference and the unveiling of this jobs-tax package. “By allowing two methods of taxation, you allow companies to game the California tax code,” said Governor Brown.
However, opponents of the jobs-tax package claim that the proposal would simply take money from one set of businesses and redistribute the money to others. Additionally, California Republican legislators were not impressed with Governor Brown’s unveiling and publically called the proposal “window dressing.”
Governor Brown would need to win a two-thirds majority for his jobs-tax proposal to become law — requiring him to get the support of at least two Republicans in both the Assembly and Senate. However, Republican leaders contend that no Republicans are likely to support the proposal.
Angélica Salceda, The Unveiling of a Jobs-Tax Proposal, Berkeley Bus L.J. Network (August 26, 2011), http://thenetwork.berkeleylawblogs.org/2011/08/26/the-unveiling-of-a-jobs-tax-proposal/