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Brown Wants Tax Code Changes To Promote California Jobs

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Jerry Brown

California Gov. Jerry Brown (Justin Sullivan/Getty Images)

Phil Matier
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SACRAMENTO (CBS/AP) – Gov. Jerry Brown on Thursday offered a tax plan designed to promote job growth within California by proposing to close one corporate tax loophole on out-of-state companies while offering incentives for businesses to hire workers in the state.

Under the plan, the governor is asking lawmakers to change a tax formula passed in 2009 that benefited large, out-of-state corporations. The move would force those companies that sell goods in California but do not employ many residents to pay more in sales tax.

“Every time an out-of-state company moves a job out of California, then they get a tax break. And every time they hire in California, they increase the taxes they pay,” Brown said during a news conference Thursday. “That is why it is truly perverse and outrageous and needs to be eliminated.”

KCBS and Chronicle Insider Phil Matier said many Republican lawmakers are already dismissing the plan.

“I don’t know if he’s going to have the votes to get this through but I think he has to try,” Matier said. “You create upper-end jobs, but are Californians asking we want lower-end jobs too? I think most Californians are saying I’ll take any kind of job at this point.”

KCBS and Chronicle Insider Phil Matier:

Continuing to remain at odds with Democrats, Republican lawmakers cast the move as a business tax increase and said the Legislature should focus on reducing regulations and frivolous lawsuits, as well as lowering public pension burden on taxpayers.

Assembly Republican Leader Connie Conway, of Tulare, said the minority party in the Legislature does not believe taxes need to be increased in order to provide business tax breaks.

“If the governor actually believes his tax breaks will stimulate the economy and create jobs, then he should move forward without raising taxes on other businesses,” Conway said in a statement.

The backbone of the governor’s plan involves changing how large, out-of-state companies calculate their tax liability. Brown wants them to calculate it solely on the portion of sales they have in California, a method called “single-sales factor.”

Under a complex 2009 budget deal constructed at the height of the state’s budget crisis, those companies were allowed to pick between two tax formulas and choose the one that allows them to pay the least in taxes. They can choose between a “double-weighted sales formula” that considers the company’s sales, property and payroll or they can use the “single-sales factor” formula based only on sales in California.

The administration contends the loophole put California-based businesses at a competitive disadvantage because out-of-state companies with no employees or property in California can cut their tax burden by half if they use the double-weighted sales formula.

The governor wants to use the estimated $1 billion from closing that loophole to provide sales tax exemptions for startup manufacturers and existing firms as an incentive to grow. He also proposes expanding employee tax credits for companies. He could not provide an estimate for the number of jobs the plan might create.

In outlining his “California Jobs First” package, Brown asked Republican lawmakers to join him and business leaders to free up money for companies that would help California’s economy.

“Preserving this bill is preserving a forcing out of California jobs—and I don’t think anybody who serves the people of California is going to want to do that,” Brown said.

California has the nation’s second-highest unemployment rate after Nevada. The official jobless rate climbed back to 12 percent last month.

Senate President Pro Tem Darrell Steinberg said back in 2009, Democrats were forced into a corner by Republicans, whose votes were needed to pass tax increases. The Legislature approved an extension on sales, income and vehicle taxes that expired this year.

Brown, a Democrat, has been trying to change that since.

He proposed closing the loophole in his original budget plan this year, but he could not get it through the Legislature. This time, instead of using the money to close the state’s deficit, he wants to direct the $1 billion in revenue toward businesses that manufacture and hire in California.

The plan calls for a 3.9 percent state sales tax exemption for startup manufacturers and a 3 percent exemption for all other firms buying manufacturing equipment. Such an exemption is aimed at benefiting California manufacturers, biopharmaceuticals, clean energy and software developers.

Brown also wants to raise the employer tax credit and give it to more small businesses. He wants to raise the credit from $3,000 to $4,000 per worker for businesses that employ up to 50 people. Currently, the credit applies only to businesses with up to 20 employees.

The proposal is drafted in two bills before the Legislature:
SB116 by Sen. Kevin de Leon, D-Los Angeles; and AB40X by Assemblyman Michael Allen, D-Santa Rosa. It requires support from at least two Republicans in the Senate and Assembly, but it did not appear to gain GOP support.

Sen. Sam Blakeslee, R-San Luis Obispo, said he’s willing to discuss tax reform only if the governor is willing to take a hard look at other changes, such as streamlining regulations, finding government efficiencies and enacting pension reform.

“I’m troubled due to the late timing of his interest in these issues; it raises a serious question as to whether he’s doing this in an effort to find bipartisan agreement or to simply prepare the bumper stickers for the next election,” Blakeslee said.

Democrats argue California and Missouri are the only two states that give companies a choice on which tax formula to use.

“If single-sales factor mandatory is good enough for Republican Gov. Chris Christie in New Jersey, it’s good enough for California,” said de Leon. “If the single-sales factor is good enough for Rick Perry in the state of Texas, then it’s good enough for the state of California.”

Brown announced his plan as he was flanked by representatives from companies including aerospace giant Boeing, pharmaceutical company Abbott Labs and Genentech, a biotech firm.

“By changing the code to single-sales factor—by reforming it—that means when we’re building in California, we’re not penalized for putting in an extra brick or an extra person in California and we’re not incentivized to build out of state. And it’s good tax policy,” said Andrea Jackson of Genentech.

(Copyright 2011 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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