On the trail of the tax loopholes

Rarely have there been so many tempting targets for those who favor closing corporate tax loopholes.

As Gov. Jerry Brown calls for $8 billion worth of cuts to California’s social services, education, public safety and state worker pay – among an array of other cuts – a study by a labor-financed, tax-equity group urged the state to eliminate some $6 billion worth of corporate tax breaks, which would not only ease the slashing of social services but make inroads into the state’s $16 billion shortfall.

The California Tax Reform Association’s recommendations come at a time when Brown is proposing $400 million in cuts to Medi-Cal, a 7 percent cut in wages to In-Home Support Services workers totaling $100 million, a $40 million cut to Cal Grant student loans, a one-time $500 million cut to courts construction, and a 5 percent cut to state employee hours that is said to save the state $400 million.

The California Labor Federation, which represents some 1,200 unions and 2.1 million workers, has asked the Legislature to do a thorough review of corporate tax breaks and loopholes that do not benefit California.

Brown, who was elected in 2010 with heavy labor support, has made it clear he doesn’t want to make the cuts.

“Government is a nurse. It’s a teacher. It’s a highway patrolman. It’s someone working in a mental hospital,” said he said last month when unveiling his revised 2012-13 budget. “And when we cut, that’s what we cut.”

Rather than reduce services that will disproportionally affect the poorest and most vulnerable in the state, the report calls for the elimination of the elective tax provision – critics call it a loophole, supporters call it an incentive — that allows out-of-state corporations to choose the method by which they will report income to California each year. The provision is known as the single sales factor because it allows companies to base their tax liability on their level of sales in California, rather than the level of their business activity as a whole.

The also report targets the oil severance tax, which puts a tax on oil as it is extracted from the ground. California, the study noted, is the only major oil-producing state that fails to tax oil production.

Doing away with these two loopholes alone could raise the state $3 billion in tax revenue, according to the report.

Critics of establishing the oil severance tax say California has other levies that make up for the loss of revenue to the state, and they believe the single sales factor encourages business development, but backers of the proposed taxes are deeply skeptical.  Other tax breaks include provisions in change-of-ownership laws that provide some $2 billion to businesses, and nearly a billion dollars from off-shore tax havens and enterprise zones, the report noted. 

“The system is broken…there just so many ways to avoid [paying] taxes, when we’re looking at the kind of cuts we’re facing, the reason for issuing this report is this is low hanging fruit in the tax system,” said Lenny Goldberg, a lobbyist and author of the report. “These (closing the loopholes) are easy things that have implications for the California economy and yet it is absolutely not being considered. And so when we are making terrible, serious cuts, we have got to be considering some of this.”  

One bill, AB 2439, is making the rounds in the state Senate after the Assembly amended the bill May 25. Co-authored by Assemblymembers Mike Eng and Nancy Skinner, both Democrats, AB 2439 calls for transparency of corporate profits and tax disclosures. One of its goals is to find out whether corporations elect to use the single sales factor, which allows out-of-state companies to choose how much income they report to California.    

“We do know there are a number of major companies in California that for some period of time did not pay any state income taxes,” Goldberg said. “Wells Fargo and Intel that paid zero in state income taxes…now we don’t know whether those are California state income taxes, but we do know that they paid zero in state income tax for parts of 2008, 2009 and 2010.”   

Big companies shouldn’t be allowed to peg their tax bill “only on the percentage of their sales done in California, which is a far smaller fraction of their income,” Goldberg wrote in an L.A. Times op-ed piece. “This is “money for nothing” — companies do not have to provide a single new job to receive a huge tax cut, which benefits their worldwide shareholders.”

The California Manufacturers and Technology Association, the California Chamber of Commerce and other business and employer-supported associations, have joined together to fight AB 2439, saying it attempts to draw conclusions about the effectiveness of the entire corporate income tax code based on one number and will lead to inaccurate conclusions and create public pressure for bad reforms.

“We’re not necessarily opposed to legislators having access to information to help them identify areas of reform, but we think the information they are seeking under this bill (such as single data points) is potentially misleading,” said Beth Mills, spokesperson for the California Bankers Association.

Mills said that in many cases corporation tax returns are publicly available and that companies work with the Franchise Tax Board to sort out some of the complex transactions. Sometimes when there is no income tax paid, the proposed law doesn’t take into account why that may be. If there were losses, for example, a corporation may be allowed to claim zero state income tax, she said.

According to Gino DiCaro, vice president of communications at the California Manufacturers and Technology Association, it is already very difficult for companies to compete in California, with manufacturers carrying an extra 13 percent tax burden on top of electricity rates that are 50 percent higher than the rest of the country. He said removing any tax incentives could force more losses on the state’s industrial job base.

There are approximately 630,000 manufacturing jobs in the state and CMTA represents about 600 companies, including Kraft, Boeing, Altria, Del Monte and Intel, among others.  

“Manufacturing has got to be seen as the backbone of any recovery for California with the highest average wages and tremendous ripple effect in the economy,” DiCaro said. “We’ve already lost a third of that job base in the last decade and these are jobs that pay on average $71,000 per year. These are the middleclass jobs that California needs. Well, we have 2 million unemployed.

“We have an unpredictable regulatory environment. We’ve got to do everything we can to make sure that California manufacturers can compete and grow in this state, which currently it’s very difficult to do so,” DiCaro added.

Steve Smith, spokesperson for the California Labor Federation, contends that the option to use the elected single sales as a means of reporting taxes discourages out-of-state companies from locating here.

“This actually incentivizes corporations to do more business and create more jobs in other states than it does in California. And so that’s one of the examples of how ludicrous of these tax breaks are,” Smith said. “The last thing we should be doing is providing incentives for corporations to move jobs out of California and subsidize them for doing it, which is precisely what the elective single sales tax does. And that’s about a billion dollars a year in additional revenue brought into California.”

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