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Sleazy Tax Deal Benefits Big Oil | Oil Watchdog

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Sleazy Tax Deal Benefits Big Oil

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Tue, Jul 24, 2007 at 5:47 pm

    Sleazy Tax Deal Benefits Big Oil

    7/24/07 by Simpson 

    Chevron stands to be one of the big beneficiaries of a tax break estimated to cost California more than $850 million in revenue when fully implemented. Speaker Fabian Núñez rammed the bill, SB 98, through the assembly as it approved the state’s budget in an all night meeting.
     
    The bill changes the way to determine how much of a company’s profits should be taxed by California.  That’s an easy matter if you’re talking about an enterprise that conducts all of its business in the state.  Then its entire income would be taxable.
     
    What about a business, like many these days, that is doing business around the world?

    The state’s tax code provides for a fair mechanism to apportion the part of income subject to California tax of a company doing business in the state. Basically it comes up with a fraction using the value of the company’s sales in the state as a portion of its total sales, its in-state payroll as a portion of total payroll and California property value as a portion of total value.

    The tax bill would allow a company that has huge sales outside California but substantial property and payroll in-state (hmm, just like Chevron), to use a different tax formula that would substantially cut its taxable income in the state.  (See the math at the end of this post.)
     

     


    SB 98
    was rammed through the Assembly without a hearing in its marathon all night budget session.  The language used for this tax break is similar to another bill, AB 1591.  The staff analysis said AB1591 would cost the state $550 million in fiscal 2007-2008 and $1.3 billion in 2008-2009 and $1.95 billion in 2009-2010.
     

     

    Among those who registered their support for the plan were Chevron, Genentech, California Chamber of Commerce, California Healthcare Institute, Novartis Pharmaceuticals, Cisco Systems and Symantech.
     

     

    It’s not clear why Núñez pushed the bill.  But remember the spring junket to South America that included Speaker? The Chevron-backed California Foundation on the Environment and the Economy footed the bill, including a stay at Rio’s ritzy Copacabana Hotel.  Do you think they may have talked about tax policy on the trip?
     

     

    Meanwhile, there is still hope on the Senate side, where Senate leader Don Perata is hoping to persuade at least two Republicans to join him so the budget will get the necessary two-thirds vote.  But Perata says he is appalled at by the tax giveaway and vows that it won’t pass the Senate. The tax break is in a separate bill from the overall budget. I hope Perata sticks by his guns and doesn’t go on any Chevron-backed junkets…
     

     

    The Math

    Here’s the nitty gritty detail on apportioning income subject to California taxation and how the tax break works:

    Remember the sales, payroll and property factors? You add those numbers together and divide by the number of factors.  Most companies are required to count the sales factor twice, so they get to divide by four.
     
    Oil companies counted each factor only once, so they divide by three.
     
    The lower the various factors in the numerator, and the more elements by which you divide in the denominator, the smaller the fraction of income liable to California taxes.
     

    SB 98
    , pushed through by Núñez, gives companies an option to reduce income taxed in California and thus, taxes paid to the state.   There’s a list of qualified expenses that don’t count toward the property factor. For every $250 million of those a company racks up, they can add one sales factor to the numerator and the value one to the denominator. You can add up to two increments a year.
     
    If you’re a company with huge sales outside of California like Chevron, the sales factor added to the numerator is miniscule. Adding as much as two to the denominator has a big impact.
     
    Here’s an example:
     
    Suppose an oil company had half its payroll and property out of the state and half within California. Each factor would 0.5.  Suppose 10 percent of its sales were in California. So, to get the portion of income subject to California tax it would be:
     
    (0.5+0.5+0.1)/1+1+1=   1.1/3= 0.37
     
    In other words this hypothetical oil company would pay California tax on a bit more than a third of its income.  Now let’s suppose the firm chalked up $500 million in qualified expenses – something quite easy for a company like Chevron — the calculation would look like this:
     
    0.5+0.5+0.1+0.1+0.1/1+1+1+1+1=  1.3/5= 0.26
     
    Now they would only pay Californa tax on about a quarter of their income.
     

     

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