Commentary: California can blame tax breaks for rising deficits, soaring profits

The Sacramento BeeMay 12, 2012 

In California, corporate profits are not merely up. They are "booming," the Legislative Analyst's Office reported not long ago.

Apple reported profits of about $1 billion a week and is the world's most valuable company. Twitter expands rapidly, and the fabulously successful Facebook is on the verge of going public, creating large numbers of new millionaires.

But while corporate profits are up, corporate tax collections are 6 percent below estimates, the result of corporate tax breaks added or expanded in recent years. The latest numbers come as a surprise to state budget writers, and that ought to sound alarms.

"It is pretty clear that something is far off," said Jason Sisney of the Legislative Analyst's Office. "The impact of one or more policy changes is greater than expected."

Gov. Jerry Brown's office plans to release a revised budget next week. The budget deficit likely will have grown to $10 billion or more, necessitating more cuts to state services.

Corporate taxes make up an ever shrinking share of the state budget, accounting for $9.4 billion in the current fiscal year, slightly less next year. Corporations won't pay the pre-recession high of $11.8 billion for at least another four years.

The corporate tax rate is 8.84 percent, but that's theoretical. The legislative analyst pegs the effective rate at about 5 percent, largely because of various tax breaks.

Believe it or not, and I know that many of you won't, but legislators are not stupid. Legislative staffers definitely are pros, who are steeped in their areas of expertise.

But they're no match for corporate tax wizards. Just as successful companies strive for the latest innovation in their cool new widgets, lawyers and accountants are paid to squeeze every penny out of every tax code section.

Part of the problem dates to when then-Gov. Arnold Schwarzenegger and legislators sought to speed corporate tax collections to solve immediate budget needs. To win support, they created new tax breaks that are taking effect now.

Various changes have cut corporate tax collections by $1.2 billion compared to what corporate taxes would have been without these changes, the analyst has said.

The breaks come by names that only accountants and lawyers could dream up, like elective single sales factor, the most significant recent change.

Corporations pay state taxes based on a formula of their sales, their payroll and their property within the state. The elective single sales factor grants businesses based outside the state the power to choose which method of taxation to use to determine their California taxable income. No dummies, they pick the method that lets them pay the least amount.

The elective single sales factor favors companies that have little property and relatively few employees here, but sell heavily into the lucrative California market. It creates a perverse incentive for companies to sell here but not to employ people here.

Although it was approved as part of Schwarzenegger's 2009 budget deal, the change took effect in 2011, Brown's first year in office. Think of it as a housewarming gift from Schwarzenegger to Brown, in reverse.

It means Brown must find $1 billion to fill the hole left by the change. Only it might not be $1 billion. It could be more. Taxes are confidential, and there is no way for the public to know which companies pay how much.

There are hints, however, based on which corporations lobby the topic. Speaker John A. Pérez is carrying legislation to repeal the 2009 tax break. Lobbyists for Kimberly Clark and International Paper testified against his bill earlier this week. Kimberly Clark and International Paper have some facilities in California, but are based in Texas and Tennessee.

General Motors and Chrysler are two others. Taxpayers bailed them out; that's a good thing. Auto factories are vital to the nation's economy. But now, GM and Chrysler are putting their taxpayer-backed lobbying power to work by fighting to keep the tax break. Perhaps if they opened a factory here they'd have a leg to stand on.

Then there's the tobacco industry. Cigarette makers Altria and R.J. Reynolds sell heavily into California, but most of their employees are based in the East and South.

For now, Big Tobacco is focused on defeating the $1 per pack tax hike in Proposition 29 on the June 5 ballot. But last year, its lobbyists killed legislation similar to Pérez's bill.

The economy has begun to mend. Rising corporate profits are an indicator of that. But you wouldn't know it based on corporate tax payments. Legislators who tweak tax codes learn hard lessons about who truly are the smartest people in the room, as do the rest of us.

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