Corporate Tax Breaks in Last Budget Deals Benefit Few, Says Report

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The California Budget Project report shows the last two budget agreements awarded millions in tax breaks to a handful of corporations.

The budget packages of September 2008 and February 2009 made three key changes in corporate income tax law, which according to the report, will result in a loss of $8.7 billion in tax revenue over the next seven years. “As lawmakers consider eliminating health coverage for over a million children and slashing funding for education, voters should ask whether we can afford billions of dollars of permanent tax breaks,” said Jean Ross, executive director of the California Budget Project in a press release.

The changes include giving corporations the option of being taxed solely on their total sales in California instead of the traditional way of taxing based on how much total business a corporation does in the state, including sales, property and payroll.

Proponents of this so-called “single-sales factor” method of assessing corporate taxes say it’s an incentive for increasing in-state employment and capital investment. Large corporations have lobbied for the method across the country.

Some 20 states have now adopted single-sales factor apportionment, but the results are dubious, said Michael Mazerov, an analyst at the Center on Budget Policy and Priorities, a Washington D.C.-based think tank. “States that have adopted it don’t have much to show for it in terms of economic development,” said Mazerov. “All they’ve done is lost a lot of revenue,” he said, noting that the competitive advantage of adopting the single-sales method goes down as more states adopt it.

The Legislative Analyst’s Office agrees that the change is expected to reduce state revenues “by hundreds of millions—or perhaps billions—of dollars annually.” And the benefits will be shared by few, according to the California Budget Project’s recent report.

Based on estimates from the Franchise Tax Board, the report found that 80% of the benefits of the single sales factor change will go to just 0.1% of the state’s corporations, the ones with gross receipts over $1 billion. Just nine corporations will each pay an average of $33.1 million less in taxes in 2013-14 thanks to the new law. Another 13 corporations will each pay $10-20 million less tax money, according to the report.

The vast majority of beneficiaries are in the utility sector – 28 companies will receive an average tax cut of $1.7 million per firm, according to the report. Next in line for highest benefits are the information technology sector and manufacturing, respectively.

The second tax change, part of the September 2008 budget agreement, allows corporations to share tax credits among related corporations. Under the new rules, if a company is eligible for a tax credit but can’t use it, it can pass that credit on to a subsidiary or otherwise related company.

The report finds that six corporations will each get an average $23.5 million in tax cuts in 2013-14 when adopting credit sharing. And 87% of benefits from credit sharing will go to California corporations earning over $1 billion annually, well below 1% of all the state’s corporations. Credit sharing will cost the state $80 million in lost tax revenue during the next budget cycle and increase to $385 million in lost revenue by 2015-16, according to the report.

While the September 2008 agreement did limit the amount of tax credits a business can claim to 50% of a its total tax due, Ross told the California Progress Report that few companies would be able to claim credits anyway in these profit-less years. Plus, the length of time businesses can carry a tax credit forward increased by 2 years, another benefit. “It ended up being a sweet trade for the corporations that will use these deductions,” said Ross.

The third tax change allows corporations to claim refunds against taxes paid in previous years if they have net operation losses in the current year. While the federal government allows these “loss carrybacks”, Ross said it’s much harder for states to handle requests for large tax refunds while maintaining a balanced budget. The federal government, on the other hand, can carry a deficit.

“States have no way to plan [for refunds],” said Ross. “It has a tremendously destabilizing impact [on the budget].” Revenue loss from carrybacks is expected to reach over $500 million in 2011-12, according to the report, while 40% of loss carryback deductions will go to corporations with gross receipts over $1 billion.

Ross presented her findings at the Budget Conference Committee on June 3. “We are hoping that there will be a revisiting with some of this,” she said.

Jill Replogle has worked as a freelance journalist in the Bay Area and Central America for eight years. She is now a student at the UC Berkeley Graduate School of Journalism. Jill is currently an intern for Protect Consumer Justice.

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