Closing the Loophole

Questions and Answers

What loophole would Prop 39 close?

At the end of the 2009 budget negotiations in Sacramento, legislators and lobbyists put a loophole into state law allowing out-of-state corporations to manipulate our tax system each year and avoid paying their fair share to California.

This loophole rewards corporations for moving jobs out of California, allowing them to reduce their state income tax if they move employees out of state. Closing this loophole will not only encourage companies to create jobs in California, but also generate approximately $1 billion in annual state revenue to reduce the budget deficit and invest in vital state programs.

How does the out-of-state corporate loophole work?

Most large states require that multi-state corporations calculate their corporate income tax using a formula based solely on a company’s in-state sales, called the “mandatory single sales factor.” California, on the other hand, has a loophole, giving out-of-state corporations the option to lower their taxes by using a different formula based on three factors: payroll, property, and sales. This formula encourages multi-state corporations to move payroll (jobs) and property (warehouses and factories) out of the state to lower their state income tax.

This puts companies that employ heavily in California at a competitive disadvantage because out-of-state companies can cut their taxes by half as much, even though they make the same amount in California sales. Prop 39 eliminates this loophole and gets rid of this tax on job creation, leveling the playing field and ensuring that all multistate companies play by the same rules.

Why does this loophole hurt California?

The loophole discourages out-of-state corporations from creating jobs and investing in California. It also costs the state approximately $1 billion a year in revenue. This is revenue that our state can use to reduce the budget deficit, help fund our schools, and create jobs through Prop 39.

This loophole also puts California companies at a competitive disadvantage because it taxes companies that create jobs in-state. Prop 39 is a win-win. It encourages out-of-state corporations to bring jobs back to California and levels the playing field for multi-state companies. It also generates revenue that will result in tens of thousands of new jobs, and advances the state’s clean energy economy while helping fund vital services.

Do other states have this corporate tax loophole?

No. With bi-partisan support from their legislatures and governors, states such as New York, Maryland, Texas, and Michigan have adopted the same tax policy in Prop 39.