During last year’s seemingly endless debate over how to close California’s budget gap, lawmakers inexplicably enacted a corporate tax cut that will cost the state $900 million in fiscal year 2011, and at least $2 billion each year thereafter.  But under recently released plans put forth by the leadership of both the Assembly and the Senate, this tax cut — known as “single sales factor,” or SSF — would very sensibly be delayed in order to avoid digging the state’s already enormous budget hole even deeper. 

Governor Schwarzenegger, predictably, has put forward an alternative plan that would not delay the phase-in of this tax cut, nor would it increase revenues in any other significant way.  Instead, the Governor’s plan would rely on severe cuts in education, child care, and support for the disabled, as well as the complete elimination of the state’s welfare program. 

According to UC Berkeley researchers, if these cuts were enacted (which is, fortunately, very unlikely) somewhere in the neighborhood of 330,000 jobs would be lost, increasing the state’s unemployment rate by about 1.8 percentage points.

Under the Senate plan, recent income tax rate increases and a reduction in the dependent care credit would be extended beyond this December in order to help fill the state’s budget gap.  License fees, alcohol taxes, and tobacco taxes would also increase.  The Assembly, by contrast, would rely primarily on borrowing, but would pay off this borrowing over time with an oil severance tax.

The one thing both chambers seem ready to agree on, though, is that the SSF phase-in should be delayed.  In a nutshell, the optional SSF tax cut enacted last year will allow large multi-state companies to chose whether or not they would like to ignore the amount of property they own in California, and the amount of payroll paid to Californians, when calculating the share of their income subject to California taxes.  Instead, if the company elects to take advantage of SSF, only the location of sales made by the company will be considered.  Since small California corporations make most if not all of their sales inside the state, this cut will provide little if any benefit to those businesses. 

ITEP’s policy brief on the subject explains the pitfalls of SSF in more detail.  It’s worth noting here, though, that California’s optional SSF is even costlier than the more common mandatory SSF, which does not allow companies the option of choosing between two different apportionment methods.

The Sacramento Bee reported this week that “the Legislature's budget analyst, Mac Taylor, argues cogently that shifting to a single-sales factor should be delayed to 2013 and be made mandatory.”  We would argue instead that SSF should be abandoned entirely, but Mr. Taylor’s alternative is undoubtedly far superior to allowing this corporate giveaway to decimate California’s budget during the coming fiscal year.


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