Represent! | Politics, government and public life for Southern California

Prop 39, initiative to close tax loophole for out-of-state companies, passes

 California voters approved an initiative to undo a tax break for out-of-state corporations and send more money to state coffers.

The initiative will close a provision in the tax code that allows multistate corporations to choose between two tax formulas. The loophole dates to a late-hour, 2009 budget deal pushed by Republican lawmakers so they would put up enough votes in the state Legislature to pass a temporary tax increase that has since expired.

Supporters of Proposition 39 say allowing multistate businesses to pick and choose tax formulas favors out-of-state companies that have little property and payroll in California.

Opponents, including the California Manufacturers and Technology Association, say businesses will be less likely to invest or expand hiring in the state.

The Yes on Prop39 campaign was funded mostly by nearly $30 million from billionaire hedge fund manager Tom Steyer, who calls it an issue of tax fairness. Steyer, founder of Farallon Capital Management, said Californians are getting a chance to close a loophole that Gov. Jerry Brown and Democratic state lawmakers weren't able to close through the Legislature.

"I view this as a very old-fashioned proposition in the sense that the citizens of California are getting a chance to close a loophole that their Legislature, even with sincere genuine efforts, hasn't been able to close," Steyer said in a recent interview.

There was no formal opposition campaign, and the idea behind the initiative is supported by many California-based companies. Some business and anti-tax groups argued that repealing the tax break would make California less business friendly, at least for out-of-state companies.

Under existing tax law, California allows multistate companies to choose between two formulas — one based on their portion of sales in California or one calculated on payroll, property and sales. Out-of-state companies can choose the latter, greatly reducing their tax bill if they have little or no assets in the state.

Proposition 39 would change the law so all businesses — from California-based Intel and Apple to Detroit automakers General Motors Co. and Chrysler — follow the same formula based on the percentage of their sales that are apportioned to the state. The Franchise Tax Board has estimated the change would raise about $1 billion a year.

The tax formula, known as single-sales factor, is used by many other states, including Michigan, New Jersey and Texas. The Legislative Analyst's Office has said that moving to the single-sales factor could result in up to 40,000 more jobs in California.

The $1 billion in additional revenue will be split between the state general fund and energy efficiency programs for the first five years, and would go entirely into the general fund after that.