02-11-09 by dugan
When the gruesome California state budget struggle finally ends,
Californians will pay: higher sales taxes, vehicle fees, gasoline taxes
and income taxes, acccording to a Sacramento Bee story with the ring of truth.
A proposal to charge a modest severance tax on oil pumped in California
appears to have vanished at the hands of oil lobbyists. Heaping more
salt on our wounds, columnist Dan Walters tells us that oil companies (i.e. Chevron) and tech companies may get a gigantic new tax break.
If you’ve been laid off and lost your home to foreclosure, your taxes
at the grocery store will still go up. You’ll still pay 12 cents a
gallon more in state tax at the pump. But Chevron and friends not only
get off scot-free, they may pay less tax–maybe much less. And because all these deals are being made behind closed doors, the public won’t have a chance to stop them before they become law. There may still be a chance that lawmakers will reflect on how this looks to an economically wrecked populace.
The
oil severance tax idea was floated by Gov. Schwarzenegger as one way to
close the budget gap, but given his strong opposition to a similar idea
in a 2006 ballot initiative, Proposition 87, it was hard to believe he
was serious. So the joke’s on us after all. The oil company P.R. on the severance tax proposal had threatened a higher price for gasoline if
the tax was imposed, but the price oil is set on world markets, not by Chevron. All other oil states impose a severance tax without any discernable effect on the price of gasoline. So now we’ll be paying more for gasoline anyway, and Chevron won’t pay a cent.
The
possible new tax break would favor large corporations who have a
headquarters in the state but sell a lot of their product out of
state–i.e. Chevron, pharmaceutical companies and tech companies.
I suspect the model, if this hideous idea ends up in the budget, will
be a 2007 bill that was eliminated from a budget package after word of
the benefit to Chevron and friends got around. The bill included an
extra tax benefit to any corporation with $250 million a year in
certain kinds of spending in the state–it was strictly for
Chevron-sized businesses. Here’s what my colleague John Simpson had to
say back then:
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 the 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 MathHere’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.