REPORT OF THE
CHIEF LEGISLATIVE ANALYST
DATE:
October 16, 2012
TO:
Honorable Members ofthe Rules, Elections and
Intergovernmental Relations Committee
FROM:
Gerry F. Miller~
~
~······· · · Chiefbegislative:Analyst
SUBJECT:
Council File No.:
12-0002-S86
.................A.ssign.mentNo.: .......... ~12d Q-0781
Resolution (Wesson-Huizar) to Support California Proposition 39.
CLA RECOMMENDA. TION: Adopt the attached Resolution (Wesson-Huizar) to include in the City's 2011-2012
State Legislative Program SUPPORT for Proposition 39, the California Clean Energy Jobs Act, which would level
the playing field for California businesses by requiring that all multi-state companies doing business in California
pay taxes based on in-state sales.
SUMMARY
Resolution (Wesson-Huizar) notes that at the end of the 2009 state budget negotiations, in a last-minute, middle-ofthe-night deal, a tax loophole was created that allows out-of-state companies to manipulate the tax system and get a
tax advantage from keeping jobs out of California. The Resolution also states that current California tax Jaws
reward out-of-state businesses by allowing them to pick one of two income tax formulas (depending on which one
is more advantageous for tax purposes): one based on the company's sales, property, and employees, and the other
based simp Jy on in-state sales.
The Resolution indicates that eliminating this loophole will make California-based businesses more competitive,
restore balance and fairness to the tax system, create new jobs and recover $1 billion a year in lost revenues.
According to the Resolution, currently pending before the voters on the November State ballot is a measure,
Proposition 39, the California Clean Energy Jobs Act, which would level the playing field for California businesses
by requiring that all multi-state companies doing business in California pay taxes based on in-state sales. According
to the Resolution, for the first five years, Proposition 39 would dedicate a portion of the new revenues to energy
efficient programs which will create jobs and reduce the State's long-term energy costs. The Resolution states that
the California Clean Energy Jobs Act would bring California's tax policy in line with the policies of many other
states, including, New York, Indiana, Texas and Michigan. The Resolution therefore recommends support of
Proposition 39.
BACKGROUND
On September 25, 2012, Resolution (Wesson-Huizar) was introduced to support California Proposition 39 which
would level the playing field for California businesses by requiring that all multi-state companies doing business in
California pay taxes based on in-state sales.
Taxing Methods for Multistate Businesses
California state Jaw allows most multistate businesses to choose one of two methods to determine the amount of
their taxable income associated with California:
Three Factor Method
Taxable income is calculated using the location. of the company's sales, property, and employees.
Single Sales Factor Method
Taxable income is calculated using the location of the company's in-state sales.
With the passage of Proposition 39, starting in 20 I 3, multistate businesses would no longer have the legal ability to
choose the method for determining their California state taxable income and instead would have to use the Single
Sales Factor Method.
Clean Energv Job Creation Fund for Energy Efficient Programs
Proposition 39 also establishes a new state fund, the Clean Energy Job Creation Fund, to be supported by revenue
generated from moving to a Single Sales Factor method. The Clean Energy Job Creation Fund would support
projects intended to improve energy efficiency and expand the use of alternative energy. The measure states that the
fund could be used to support: I) energy efficiency retrofits and alternative energy projects in public schools,
colleges, universities, and other public facilities; 2) financial and technical assistance for energy retrofits; and 3) job
training and workforce development programs related to energy efficiency and alternative energy.
Additionally, Proposition 39: l) specifies that all funded programs must be coordinated with the California Energy
Commission and the California Public Utilities Commission; and 2) creates a new nine-member oversight board to
annuallyre;ciew..a.ud...eYaln<!lespen<iirrg ff9lli. !h~Jund,
California State Legislative Analyst's Office
Clean Energv Job Creation Fund
The California State Legislative Analyst's Office estimates that Proposition 39 would increase state
revenues by approximately $500 Million in Fiscal Year (FY) 2012-13 and by $1 billion annually starting in
FY 2013-14. For FY 2013-14 through FY 2017-18, approximately half of the additional funds ($500
Million) would be transferred to the Clean Energy Job Creation Fund described above.
School Funding Guarantee
The Legislative Analyst's Office indicates that as a result of the additional revenues, school funding
will likely rise. Pursuant to Proposition 98 (passed by California voters in 1988), a minimum level of
state and local funding must be allocated each year for public schools and community colleges. This is
known as Proposition 98 Minimum Guarantee. The Proposition 98 Guarantee can grow with increases
in State General Fund revenues. Accordingly, a measure such as Proposition 39 that results in higher
revenues can also result in higher school funding. The Legislative Analyst's Office anticipates that the
higher revenues would likely increase the minimum guarantee by at least $200 Million for the period
FY 2012-13 through FY 2017-18.
Proposition 39 will not increase taxes for California business. Instead, it will level tbe playing field for
California businesses by· allowing only the Single Factor Method for taxation of multistate businesses.
Given the potential revenues for schools and energy efficient projects, it is recommended that the City
support Proposition 39.
DEPARTMENTS NOTIFIED
Office of Finance
lipe Valladolid Ch
Analyst
Attachments:
GFM:fvc
Resolution
2