The Tax That Dare Not Speak Its Name: California’s Proposition 39 takes aim at out-of-state businesses.
Taxes remain on most voters’ minds as Election Day approaches in California. Over the past year, the Left and far Left have fought a protracted public battle over the best way to extract more revenue from the state’s taxpayers. The more moderate approach, relatively speaking, is Governor Jerry Brown’s Proposition 30, which would make “temporary” increases to the state sales tax and to income-tax rates for high earners (the “temporary tax” being the jackalope of American politics), splitting the resulting revenues between education and the state’s general fund. Competing with Brown’s proposal is Proposition 38, the brainchild of wealthy liberal activist Molly Munger, which relies on across-the-board income-tax increases (also supposedly temporary) for all but California’s very poorest and pledges to send the overwhelming majority of the money directly to schools.
But while Brown’s and Munger’s proposals battle it out, a more low-key initiative near the bottom of California’s crowded ballot, cloaked in nearly incomprehensible language, has largely escaped public scrutiny. Proposition 39 would do nothing more than close a loophole in California’s tax code, effortlessly producing $1 billion a year in the process—or so its proponents say. At issue is the method by which businesses calculate their tax liability to the state. Under current law, multistate companies may choose between two different formulas for tallying their tax obligations. Businesses can either pay a rate based on a weighted combination of in-state sales, employees, and property, or they can pay one on the basis of sales alone (often referred to as the “single-sales factor”). Companies are free to choose whichever approach minimizes the total amount they owe Sacramento. Under Prop. 39, that freedom would be abolished, and all companies would be forced to pay the single-sales factor, resulting in a tax increase on many companies headquartered outside of California.