Prop 24 – Repeal Business Tax Cuts (i.e. Increase Business Taxes)

Proposition 24 – Repeals recent legislation that would allow businesses to lower their tax liability. Initiative Statute.

Measure Details:

  • Repeals three recent laws that allowed businesses to pay lower taxes.
    • Repeals a 2008 law (passed by the legislature and signed by the Governor) that will allow businesses to deduct operating losses in the present year from their tax liability in a past year, entitling them to a refund for taxes paid in that year.
    • Repeals a 2009 law (passed by the legislature and signed by the Governor) that allows businesses operating in multiple states to choose between two formulas to determine their tax liability in California. Businesses will be able to switch back and forth between formulas to minimize their tax liability. If Prop 24 is passed, companies will have to use the formula that calculates tax liability as a function of value of business properties, value of payroll, and the value of sales in California.
    • Repeals a 2008 law (passed by the legislature and signed by the Governor) allowing businesses to share tax credits among other businesses in their “unitary group” (multiple businesses that operate jointly or are run by the same management).

Arguments For:

  • This proposition would close tax loopholes that are reducing tax revenues, thus contributing to California’s budget crisis.
  • Corporations in California already use tax loopholes to dramatically reduce their tax burden, and these specific tax breaks primarily benefit large, profitable companies.
  • Increased tax revenue will be used to balance the budget and will provide significant funding for teachers and public safety employees.

Arguments Against:

  • Prop 24 will tax companies that create jobs in California, because it will force companies to use the formula that includes the size of the companies’ payroll as a determinant of tax liability.
  • It will force small businesses out of business by “limiting their ability to spread out losses over time”
  • While it may increase tax revenues in the short-term, in the longer term it will stifle economic growth and reduce the tax base, thereby reducing tax revenues.

My Take:

This really comes down to the “taxes-versus-growth” debate that has been front and center on the national stage since the days of Reagan, who ran on a platform of “supply-side economics.” Basically, supply-side economics argues that reducing tax rates will actually lead to an increase in tax revenues because it will promote growth, so while companies are paying a lower percentage of their income in taxes, their income will increase enough to make up for that lowered percentage. As Senate Minority Leader Mitch McConnell put it earlier this year, “there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.”

The problem with this is that it’s not really supported by the evidence. Responding to McConnell’s claim, Derek Thompson at the Atlantic put together a series of quotes from Bush economic advisors saying that the Bush tax cuts diminished revenue. More generally, this piece by Kevin Williamson at National Review Online (a conservative-leaning site) provides a take-down of the conservative talking points about supply side economics over the last 30 years, highlighting that there’s a big difference between tax-cut driven growth that offsets some of the revenue losses due to lower rates and tax-cut driven growth that offsets all of the revenue losses and then some. Williamson argues that tax cuts can be effective when they come with reductions in spending, but as we’ve seen lately, cutting spending is easy to talk about, but hard to do.

Now California’s in a slightly different position here, because it is much easier for a company to leave California for another state than it is to leave the US for another county. So it is possible that increasing taxes on corporations in California could cause some flight to other states.

Personally, I think that the idea of fleeing California for greener tax pastures is not such a big deal that it will crush the economy if we close these loopholes. For one thing, despite a federal tax rate of 35%, Google was able to reduce their tax burden to about half that with accounting tricks and offshore holdings. Also, this argument ignores the possibility that California is simply a better place for these companies to be located, because of the workforce which they can access and the creative communities (like Silicon Valley), among other things.

I think that there is definitely work that could be done on the budget, reducing budget shortfalls by improving the effectiveness of government spending, but that requires a political will that is conspicuously absent these days. But I also believe that the government provides many important services that need to be paid for somehow. Corporations are generally much better at finding ways around paying their share than individuals, so creating additional loopholes for businesses has the possibility of increasing the tax burdens on the citizens of California. And given the choice between closing tax loopholes for corporations, increasing taxes on individuals, and expecting unrealistic decreases in spending, I’ll take taxing the corporations.

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One Response to Prop 24 – Repeal Business Tax Cuts (i.e. Increase Business Taxes)

  1. RS says:

    My gut reaction is to agree with you… If I only had those three options, then taxing corporations over individuals seems to be the “right” thing to do. But I think this is a really really bad idea in the long term.. the last thing California should be doing is making it more expensive for companies to operate here. Sure, they may have access to a better workforce in California, but that’s hardly a lasting thing.. If the incentives are strong enough, people will move, and corporations will figure out a way to be innovate elsewhere. Heck, California should be cutting corporate taxes even further.

    Also, re: Google. I don’t know the details, but I believe the U.S. government insists on taxing global income which makes it harder for U.S. companies to compete with local firms in foreign countries who have to pay a lower tax. The solution (which I believe most multinationals use) is to have these foreign subsidiaries etc. to avoid paying the higher U.S. tax rate on their foreign income. If the U.S. tax system was simpler (and more reasonable), they wouldn’t have to do it. And plus, Google is probably doing more for the U.S. economy than the government would have been able to do with that extra bit of cash, even if it means that they’re investing in crazy things like self driving cars.

    P.S. Since I’m already siding with the corporations, am I the only one who gets annoyed by Barbara Boxer’s ads against Fiorina. Fiorina sucks, but blaming her for manufacturing products in China or outsourcing jobs is silly.

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