TAX NEWS - JUNE 2010

California Tax: Unitary taxation still around

by Dan Walters, 01 June 2010 -- Unitary taxation is one of those complex political issues with huge financial impacts about which very few people have any knowledge, even those in the Legislature who vote on tax policy.

In short, this is the decades-old debate over how California levies income taxes on multistate and multinational companies.

Gov. Arnold Schwarzenegger and the Legislature changed the system last year as part of a state budget deal, reducing corporate taxes by hundreds of millions of dollars.

With the state budget still running deficits, Democrats are demanding that its implementation be delayed.

For decades, California and many other states apportioned the taxable part of a company's revenues by equally weighing its sales, property and payroll within the state.

California also used the same system for multinational corporations, which set it apart from other states.

Immense political battles were waged in the Capitol during the 1970s and 1980s over the relatively aggressive formula California was using to calculate multinationals' taxable revenues.

Then-Gov. Jerry Brown was originally a strong defender. But after an investment-seeking trip to Japan, he turned against it, accused the state's top income tax collector, Martin Huff, of furnishing "flaky data," and engineered Huff's ouster.

Eventually, California allowed multinationals to use a more favorable "water's edge" system and made sales the dominant factor in calculating the taxable incomes of multi-state firms.

California corporations, however, want a system in which their property and payroll in California would be disregarded and sales would be the only criterion for apportioning income.

This would be a huge tax break for California corporations. They argue it would encourage them to add payroll and production inside the state rather than elsewhere.

Last year, as part of a state budget deal, corporations were given an alternative to use the "single-sales" system beginning in 2011.

It's estimated that state revenues would drop by some $900 million in the 2010-11 fiscal year and at least $2 billion every year thereafter presumably offset by expanded operations in the state.

Democrats contend, justifiably, that with huge budget deficits and the specter of wholesale slaughter in state services, it's no time to consciously cut revenues.

Were Brown to return to the governorship, as he hopes, he'll find unitary taxation still on the political agenda.