BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 116                      HEARING:  7/13/11
          AUTHOR:  de León                      FISCAL:  Yes
          VERSION:  7/7/11                      TAX LEVY:  No
          CONSULTANT:  Miller                   

                         MANDATORY SINGLE SALES FACTOR

          
          (1) Makes single sales factor mandatory; (2) Expands the 
          2009 jobs credit;  (3) Adds a manufacturing equipment sales 
          & use tax exemption; (4) Creates a new education credit; 
          (5) Changes the cost of performance/market rule for cable 
          companies; (6) Allows an election of single factor or 3 
          factor only when the tax is greater under the 3 factor 
          formula.


                                   Existing Law

           I.  Apportionment Formula  .  A multistate firm generates 
          profits based on its operations in many states, and has a 
          right under the U.S. Constitution to divide income between 
          these states for tax purposes, a process known as 
          "apportionment," to ensure that no state taxes more than 
          its fair share of that firm's income.  The 1957 Uniform 
          Division of Income for Tax Purposes Act (UDITPA) created 
          the three-factor double weighted apportionment framework to 
          capture the factors of production; specifically, property 
          to represent capital, payroll to represent labor, and sales 
          to represent market presence.  

          In 1966, California adopted UDITPA where each of the three 
          factors had an equal weight of one-third.  In 1993, 
          California adopted a "double-weighted" formula, reducing 
          the formula's weights on both property and payroll from 
          33.3% to 25%,  but increasing the weight on sales from 
          33.3% to 50%, thereby reducing that share of a the firm's 
          income apportioned to states where it employs relatively 
          more people and produces more goods in the state compared 
          to its sales.  Under the change, a firm with all or most of 
          its production and payroll in California, but a smaller 
          share of its sales, benefits from the change, whereas a 
          firm that either employs few or no people or owns little to 
          no property here, but sells into California, pays more tax. 




          SB 116 -- 7/7/11 -- Page 2



           Many other states also changed the apportionment weights 
          in the 1980s and 1990s to induce firms to maintain or 
          relocate facilities and employees in the state.  

          Starting in 2011, California's apportionment formula allows 
          multi-state firms to annually choose either the above 
          apportionment formula or to use only its sales, commonly 
          known as the "single sales factor."

          Each of the factors in the apportionment formula is a 
          fraction: the numerator is the value of the item in 
          California and the denominator is the value of the item 
          everywhere.  The property factor generally includes all 
          tangible property owned or rented during the taxable year.  
          The payroll factor includes all forms of compensation paid 
          to employees.  The sales factor includes all gross receipts 
          from the sale of tangible and intangible property.  

          Since 1993, the apportionment formula for most taxpayers 
          has been a three-factor double weighted formula consisting 
          of payroll, property and double weighted sales as 
          illustrated below.

           --------------------------------------------------------- 
          | Average | +  |Average |+     |Californ|)  | California  |
          |Californi|    |Californ|   (2x|   ia   | = |Apportionment|
          |    a    |    |   ia   |      | Sales  |   |   Formula   |
          |Property |    |Payroll |      |        |   |             |
          |---------+----+--------+------+--------+---+-------------|
          | Average |    |Average |      | Total  |   |             |
          |  Total  |    | Total  |      | Sales  |   |             |
          |Property |    |Payroll |      |        |   |             |
           --------------------------------------------------------- 

          The only exceptions to this rule are four industries: 
          agriculture, extraction, including oil, savings and loan 
          and financial services.  These four industries must use the 
          three factor formula without the double weighted sales 
          factor.  

          Beginning in 2011, as illustrated below, a qualified 
          business may elect to use a single sales factor based on 
          100 percent sales, instead of the three factor formula 
          described above.  The industries listed above still do not 
          qualify for the single sales factor.  






          SB 116 -- 7/7/11 -- Page 3



           --------------------------- 
          |Californi| =  |California  |
          | a Sales |    |Apportionmen|
          |         |    | t Formula  |
          |---------+----+------------|
          |  Total  |    |            |
          |  Sales  |    |            |
           --------------------------- 

          II.  Intangible Sourcing  .  As part of the budget agreement 
          of 2010 (SB 858, Committee on Budget & Fiscal Review, 
          2010), taxpayers electing the three-factor, double-weighted 
          sales formula must use the cost of performance method to 
          source sales of intangible items starting with the 2011 
          taxable year; taxpayers electing sales factor-only 
          apportionment of income must source the sales of 
          intangibles to California using the market rule.  
          Intangibles are everything that isn't "stuff", and include 
          all services, such as online stockbrokers and 
          telecommunications, and licenses to operate software 
          programs, among others.

           Sales of Intangibles - "Costs of Performance  ."  A company 
          includes no revenue from its sales of intangibles to 
          California in the sales factor if the firm incurs a 
          plurality of the costs associated with developing these 
          products or services in another state; if the plurality 
          occurs in California, then the company includes all of its 
          sales in its California sales factor.  For example, a 
          company that produces streaming video may spend $500,000 in 
          California and $520,000 in Oregon when developing the 
          service.  The firm does not include any sales of its sales 
          of streaming video in this state in its California sales 
          factor, because it incurred most of its costs of 
          performance outside the state.  Had the firm incurred most 
          of its costs of performance in California, the taxpayer 
          must include all of its sales of the video service in its 
          California sales factor.

           Sales of Intangibles - "The Market Rule  ."  Under the 
          competitively-neutral market rule, all firms source these 
          sales based on the state in which the product or service is 
          ultimately used, so all firms report sales based on how 
          much they sell in the state, instead of where they invested 
          when developing the intangible item or service.  Each 
          license for an operating system used on a California 





          SB 116 -- 7/7/11 -- Page 4



          personal computer would be included in the software firm's 
          California sales factor.  In the example above, the firm 
          would include its sales of the video service to customers 
          in this state in its California sales factor.

          The following chart summarizes California's history of both 
          apportionment and intangibles.

           ---------------------------------------------------------- 
          |             |1966 -     |1993-2010     |2011             |
          |             |1992       |              |                 |
          |-------------+-----------+--------------+-----------------|
          |Apportionment|3-factor   |3-factor      |Elective         |
          |             |formula    |formula       |(3-factor        |
          |             |           |(double-weight|formula with     |
          |             |           |ed sales      |double weighted  |
          |             |           |factor)       |sales  or single |
          |             |           |              |sales factor)    |
          |-------------+-----------+--------------+-----------------|
          |Intangibles  |Costs of   |Costs of      |Cost of          |
          |             |performance|performance   |performance if   |
          |             |           |              |elect 3-factor;  |
          |             |           |              |formula; market  |
          |             |           |              |rule if single   |
          |             |           |              |sales factor     |
          |             |           |              |elected          |
          |             |           |              |                 |
           ---------------------------------------------------------- 

          III.  Jobs Tax Credit  .  Current state law, SB x 3 15 
          (Calderon, 2009) allows a credit for taxable years 
          beginning on or after January 1, 2009, for a qualified 
          employer in the amount of $3,000 for each qualified 
          full-time employee hired in the taxable year, determined on 
          an annual full-time equivalent basis.  The calculation of 
          annual full-time would be the total number of hours worked 
          for the taxpayer by the employee (not to exceed 2,000 hours 
          per employee) divided by 2,000.  This credit is allocated 
          by the Franchise Tax Board (FTB) and has a cap of $400 
          million for all taxable years.  The credit remains in 
          effect until December 1 of the calendar year after the year 
          in which the cumulative credit limit has been reached and 
          is repealed after that date.  Any credits not used in the 
          taxable year may be carried forward up to eight taxable 
          years. 
          





          SB 116 -- 7/7/11 -- Page 5



          A qualified employer is a taxpayer employing 20 or less 
          employees.

          In addition, both the Personal Income Tax Law (PITL) and 
          Corporation Tax Law (CTL) provisions regarding this credit 
          contain certain anti-abuse rules.  These rules were 
          designed to prevent an existing business from being treated 
          as first commencing business in the state when the business 
          simply changed structure, i.e. changed from a sole 
          proprietor to an S-corporation.
          

          IV.  Sales & Use Tax  .  Existing law provides no special tax 
          treatment to entities engaged in manufacturing or software 
          production for purchases of equipment and other supplies. 
          Business entities engaged in manufacturing, research and 
          development, and software producing activities that make 
          purchases of equipment and supplies for use in the conduct 
          of their manufacturing and related activities are required 
          to pay sales and use tax on their purchases to the same 
          extent as any other person either engaged in business in 
          California.

          The state sales and use tax rate is 8.25% as detailed 
          below.  Cities and Counties may increase the sales and use 
          tax rate up to 2% for either specific or general purposes 
          with a vote of the people. 


                       --------------------------------------- 
                      |4.75%| State  |Goes to State's General |
                      |     |        |          Fund          |
                      |     |        | (Total General Fund is |
                      |     |        |          6%)           |
                      |-----+--------+------------------------|
                      |0.25%| State  |Goes to State's General |
                      |     |        |          Fund          |
                      |     |        | (Total General Fund is |
                      |     |        |          6%)           |
                      |-----+--------+------------------------|
                      |0.25%| State  |  Goes Towards State's  |
                      |     |        | Fiscal Recovery Fund,  |
                      |     |        |  to pay off Economic   |
                      |     |        | Recovery Bonds (2004)  |
                      |-----+--------+------------------------|
                      |0.50%| State  |  Goes to Local Public  |





          SB 116 -- 7/7/11 -- Page 6



                      |     |        | Safety Fund to support |
                      |     |        | local criminal justice |
                      |     |        |   activities (1993)    |
                      |-----+--------+------------------------|
                      |0.50%| State  | Goes to Local Revenue  |
                      |     |        | Fund to support local  |
                      |     |        |   health and social    |
                      |     |        |services programs (1991 |
                      |     |        |      Realignment)      |
                      |-----+--------+------------------------|
                      |1.00%| Local  |  0.25% Goes to county  |
                      |     |        |  transportation funds  |
                      |     |        | 0.75% Goes to city and |
                      |     |        |   county operations    |
                      |-----+--------+------------------------|
                      |Total|        |                        |
                      |  :  |        |                        |
                      |-----+--------+------------------------|
                      |7.25%|State/Lo|  Total Statewide Base  |
                      |     |  cal   |Tax Rate                |
                      |     |        |                        |
                       --------------------------------------- 


          For a ten-year period ending December 31, 2003, California 
          law provided a partial (General Fund only) sales and use 
          tax exemption for purchases of equipment and machinery by 
          new manufacturers, and income and corporation tax credits 
          for existing manufacturers' investments (MIC) in equipment 
          (SB 671, Alquist, 1993).  The bill provided an exemption to 
          the state tax portion for sales and purchases of qualifying 
          property, and the income tax credit was equal to six 
          percent of the amount paid for qualified property placed in 
          service in California.  Qualified property was depreciable 
          equipment used primarily for manufacturing, refining, 
          processing, fabricating or recycling; for research and 
          development; for maintenance, repair, measurement or 
          testing of qualified property; and for pollution control 
          meeting state or federal standards.  

          The MIC had a conditional sunset date which required that 
          the provisions sunset in any year following a year when 
          manufacturing employment (as determined by the Employment 
          Development Department) did not manufacturing employment by 
          more than 100,000.  On January 1, 2003, manufacturing 
          employment, less aerospace, did not exceed the 1994 





          SB 116 -- 7/7/11 -- Page 7



          employment number by more than 100,000 (it was less than 
          the 1994 number by over 10,000), and therefore the MIC and 
          partial sales tax exemption sunset at the end of 2003.



                                   Proposed Law
           
          I.  Apportionment Formula  .  As amended, this bill amends the 
          apportionment formula in two ways:
           
             1.   Single Sales Factor :  This bill makes the single 
               sales factor apportionment formula mandatory for all 
               taxpayers except those in a qualified business 
               activity (extractive, agricultural, savings and loans, 
               and banks and financial services) for taxable years 
               beginning on or after January 1, 2011. 

           
             2.   Elective Single Sales Factor & 50% assignment of 
               intangibles to this state  .  As introduced, SB 116 
               required all taxpayers to use the mandatory single 
               sales factor.  As amended, this bill allows taxpayers 
               to choose the 3-factor formula only when it results in 
               a greater amount of tax owed.   

           
          II.  Intangible Sourcing.  50/50 market costs of 
          performance  .  SB 858 (Committee on Budget, 2010) requires 
          that companies that elect single sales factor choose the 
          "market" rule and source all intangible property to this 
          state and taxpayers that elect to pay taxes under the 
          3-factor formula source intangible property to where the 
          goods originate.  SB 116 as amended, allows cable companies 
          to choose either that have a "minimum investment" in this 
          state of $250 million or more, to assign 50% of their 
          intangible property to "this state" under the market rule 
          and 50% shall "not be assigned to this state."  
           
          III.  Jobs Tax Credit  .  SB 116 expands the eligibility for 
          the jobs credit to employers with 50 or fewer employees, 
          and also increases the amount of the credit from $3,000 to 
          $4,000 for each new hire.  
          
          IV.  Manufacturing Equipment Sales Tax Exemption  .  Current 
          law provides that all tangible personal property in this 





          SB 116 -- 7/7/11 -- Page 8



          state is subject to the sales and use tax.   
           
          SB 116 creates a new manufacturing sales & use tax 
          exemption.  The bill provides that starting in 2012-13, 
          companies would be given a 1% exemption from the General 
          Fund Sales and Use Tax (SUT) for equipment, and start-up 
          companies would be eligible for a 5% exemption.
           
           V.  K-12 Education Investment and Higher Education 
          Investment Tax Credit Programs  .  Existing law provides for 
          a deduction against net tax for any charitable 
          contribution.  The law also provides for various credits 
          with the intent of changing behavior or encouraging 
          investment.  
           
          SB 116 creates a new credit against net tax.  The bill sets 
          up a special fund within the general fund to which 
          taxpayers may contribute.  The bill provides a 75% credit 
          for contributions to the special fund.  This credit may not 
          be combined with any other deduction or charitable 
          contribution.  

          VI.  Urgency Clause  .  SB 116 adds urgency clause  
           

                               State Revenue Impact
           
          
            ---------------------------------------------------------------- 
           |     Estimated Revenue Impact of SB 116 as Amended on 7/7/2011  |
           |----------------------------------------------------------------|
           |        For Tax Years Beginning On Or After January 1, 2011     |
           |----------------------------------------------------------------|
           |               Enactment Assumed After June 30, 2011            |
           |----------------------------------------------------------------|
           |                                                                |
            ---------------------------------------------------------------- 
           |-------------+-----------+------------+------------+------------|
           |             |   2011-12 |    2012-13 |    2013-14 |    2014-15 |
           |-------------+-----------+------------+------------+------------|
           |    Job Tax  |   -45,000,|   22,000,00|   45,000,00|   55,000,00|
           |     Credit  |      000  |        0   |        0   |        0   |
           |-------------+-----------+------------+------------+------------|
           |   Education |   -420,000|   -900,000,|   -950,000,|   -950,000,|
           |      credit |      ,000 |       000  |       000  |       000  |
            ---------------------------------------------------------------- 





          SB 116 -- 7/7/11 -- Page 9



           |   Mandatory |   1,300,00|   $1,100,00|   $1,100,00|   $1,000,00|
           |       SSF   |     0,000 |      0,000 |      0,000 |      0,000 |
            ---------------------------------------------------------------- 
           |    Special  |   -38,000,|   -38,000,0|   -37,000,0|   -39,000,0|
           |      sales  |      000  |       00   |       00   |       00   |
           |     rule-cab|           |            |            |            |
           |        le   |           |            |            |            |
           |      corps  |           |            |            |            |
            ---------------------------------------------------------------- 
           |   Sales and |   -261,000|   -275,000,|   -291,000,|   -301,000,|
           |     Use Tax |      ,000 |       000  |       000  |       000  |
           |             |           |            |            |            |
           |-------------+-----------+------------+------------+------------|
           |   Net       |   536,000,|   -91,000,0|   -133,000,|   -235,000,|
           |     Fiscal Impact|      000  |       00   |       000  |000         |
           |             |           |            |            |            |
            ---------------------------------------------------------------- 
           
                                     Comments  

          1.   Purpose of the bill  .  SB 116 seeks to stop rewarding 
          companies that move jobs out of state, incentivize job 
          creation here at home, and save California taxpayers over 
          $1 Billion annually through the implementation of a 
          mandatory single sales factor in the calculation of 
          corporate taxes owed to the state.  The trend around the 
          country is states moving towards the "single sales factor" 
          method for the calculation of taxes.  However, in 
          California's adoption of this method in 2009, instead of 
          adopting a mandatory single sales factor like the vast 
          majority of other states-including Texas, New York, 
          Michigan, Illinois, Oregon, Washington, and just last 
          April, New Jersey-our tax law has an annual elective single 
          sales factor.  Allowing corporations to choose the 
          three-factor, double weighted formula, which lowers their 
          tax liability the smaller their California presence, 
          unfairly benefits companies that move jobs or base the bulk 
          of their operations out-of-state-at the expense of $1 
          Billion/year to California's taxpayers.  In order to 
          eliminate this competitive disadvantage and level the 
          playing field for California-based companies, we need to 
          make the single sales factor mandatory.  SB 116 is about 
          putting California first-we should be encouraging job 
          creation and greater investment here in our home state, 
          instead of rewarding out-of-state corporations and 
          California companies that move jobs out of state.  





          SB 116 -- 7/7/11 -- Page 10




          According to the recent Legislative Analyst's Office (LAO) 
          report, Reconsidering the Optional Single Sales Factor 
          (2010), adoption of a mandatory single sales factor would 
          result in a net gain of tens of thousands of jobs in 
          California.  Other components of SB 116 also seek to 
          facilitate job creation and assist in California's economic 
          recovery by expanding eligibility for the existing Jobs 
          Credit, and providing a sales tax exemption on the purchase 
          of manufacturing equipment.  In addition, two new tax 
          credit programs-the K-12 Education Investment Tax Credit 
          and the Higher Education Investment Tax Credit-would 
          provide taxpayers with access to $1 Billion in tax credits, 
          and direct funds generated towards our under-funded public 
          education systems.  State budget solutions over the last 
          several fiscal years have included deep cuts and payment 
          deferrals to K-12 Education and the University of 
          California, California State University, and California 
          Community College systems.  These tax credit programs will 
          help in the repayment of money owed to schools under 
          Proposition 98, and help rebuild the state's investment in 
          education.

          2.   Shot through the heart .  In an opposition letter, the 
          California Chamber of Commerce, the California 
          Manufacturers & Technology Association and CalTax state 
          that the elective single sales factor was a "remarkable, 
          although rare, bright spot in California's notoriously bad 
          business climate."  The three groups state that the state 
          was correct in making the single sales factor elective in 
          2009 and that the attempt to make it mandatory negates the 
          importance of business contributions to the state's overall 
          economic health.  Furthermore, the opposition states that 
          not all business models fit easily into a single sales 
          calculation, but these companies have significant 
          investments of property and payroll in California.  The 
                                       size of their sales in one of the largest markets in the 
          world renders those investments moot by comparison.  
          Finally, they state that SB 116 will "cut the heart out of 
          an already weakened California economy."

          3.  Of Fractions of Loaves  .  As introduced, SB 116 
          implemented Governor Brown's proposal in his January Budget 
          to remove the ability for firms to choose which 
          apportionment formula leads to paying the lowest tax, and 
          require all firms to source sales of intangible goods 





          SB 116 -- 7/7/11 -- Page 11



          according to the market rule instead of the former "costs 
          of performance" method.  The Legislature did not enact the 
          change in income apportionment as part of the Budget, which 
          are contained in AB 103 (Committee on Budget) and SB 79 
          (Committee on Budget and Fiscal Review).  As amended, the 
          measure is less aggressive: allowing firms to still choose 
          the three-factor, double weighted method if they'd rather 
          apply accrued tax credits (only if they would owe more 
          tax), partially carving cable companies out of the impact 
          of the change to the market rule, adding a tax credit for 
          donations to public education, and providing a limited 
          sales and use tax exemption.   These sweeteners come on top 
          of considerable tax breaks the Legislature has enacted in 
          recent years, such as house purchase tax credits (SBx2 15, 
          Ashburn, 2009), motion picture production tax credits (ABx3 
          15, Krekorian, SBx3 15, Calderon, 2009), sales and use tax 
          exemptions for solar manufacturing (SB 71, Padilla, 2010), 
          tax credit sharing and net operating loss carrybacks (AB 
          1452, Committee on Budget 2008), as well as a safe harbor 
          from the large corporate understatement penalty, and 
          waiving NOL suspensions for single taxpayers (SB 858, 
          Committee on Budget, 2010).  As introduced, the measure 
          raised more than $1 billion, now it raises only negative 
          $235 million when fully implemented in 2014-15, no 
          accounting for the contributions to the General Fund 
          through the education credit.  The Committee may wish to 
          consider whether abandoning the Governor's Proposal in 
          favor of a measure that implements its changes in a less 
          ambitious way in exchange for new tax breaks for specified 
          taxpayers is merited in these times of continued fiscal 
          stress and the recent history of adding more and more 
          taxpayer-specific benefits to the tax code.

          4.   There's a first time for everything .  SB 116 creates a 
          new credit for education expenses in this state through 
          contributions to the general fund.  For example, a taxpayer 
          would give $100 to a special fund within the general fund 
          specifically for education but he or she would not be able 
          to designate a school or program for the funds.  In return, 
          the taxpayer receives a $75 credit for the funds while the 
          state keeps a full $25 of the original $100.  Generally, 
          credits are given to influence or change behavior, this 
          credit is to fund state programs.  The Committee may wish 
          to consider the utilization of such a credit and what 
          information is necessary to encourage taxpayers to 
          contribute.   





          SB 116 -- 7/7/11 -- Page 12




          5.   Which way ?  Currently, taxpayers can take the 
          charitable deduction for "public purpose" donations to the 
          general fund.  Taxpayers can reduce their income by an 
          average of 30% for state and federal purposes, subject to 
          limitations and the Alternative Minimum Tax.  This bill 
          allows taxpayers to take a 75% credit plus the federal 
          deduction.  Does a credit allow a greater benefit that we 
          will see more contributions than we would have under a 
          charitable donation?  Why identify public education 
          donations as special when health and human services have 
          suffered far deeper budget cuts, lack the Constitutional 
          funding protection of Proposition 98, and voters appear far 
          less willing to enact special taxes for health and human 
          services than for education?  The Committee may wish to 
          consider whether this credit is necessary; additionally, it 
          may also wish to consider the efficacy of limiting it to 
          one public service. 

          6.   Let them pay more  .  This bill allows only one group of 
          taxpayers to choose between the single sales factor and the 
          3-factor formula: those businesses that would pay more 
          under the 3-factor formula.  The author argues that some 
          companies need this option in order to fully utilize their 
          available credits.  The Committee may wish to consider if 
          there is a possibility that taxpayers would still pay less 
          under less under the 3-factor formula because of the 
          availability of credits which the calculation in this bill 
          does not consider.

          7.   If you build it, they will come  .  AB 116 includes a 
          partial sales and use tax exemption for manufacturing 
          similar to the one the Governor proposed in his May 
          revision.  Starting in 2012-13, companies would be given a 
          1% exemption from the General Fund Sales and Use Tax for 
          equipment, and start-up companies would be eligible for a 
          5% exemption.  Since purchases of tangible property used in 
          manufacturing is subject to the sales and use tax, and the 
          output of manufacturing is also subject to sales and use 
          tax when products are sold, there is a "double-taxation" 
          that is levied on corporations.  The proposed sales tax 
          exemption seeks to alleviate this cost and provide an 
          incentive for buying capital and locating manufacturing 
          equipment here in California.  The Governor's May Revision, 
          however, required that the exemption be conditioned on the 
          sales and use tax 1% extension which expired on July 1st of 





          SB 116 -- 7/7/11 -- Page 13



          this year.  The Committee may wish to consider whether a 
          sales and use tax exemption, absent the tax extensions 
          makes sense.

          8.   What a way to make a living.  The jobs credit SB 116 
          seeks to amend has been in effect since 2009 and there is 
          little evidence that it has affected unemployment in this 
          state.  California experienced steep employment declines 
          during the recent recession and the state's unemployment 
          rate is persistently higher than the national average.  
          Academic literature suggests that no state tax policy can 
          affect high unemployment in this state.  A recent study by 
          David Neumark at the Public Policy Institute of California 
          (PPIC) suggests two direct job creation policies: hiring 
          credits and worker subsidies such as the federal Earned 
          Income Tax Credit.  At the February 16th hearing of this 
          committee, Mr. Neumark presented his findings.  He argues 
          that hiring credits act to increase the demand for labor 
          and are the best policy response to spur a recovery from 
          the recession.  He suggests that hiring credits should 
          focus broadly on the recently unemployed and establish 
          incentives for new hires rather than increases in the work 
          hours of existing employees.  In order to be effective, the 
          credits would need to be between $9,100 to $75,000 per 
          employee so state funding would contribute only modestly at 
          best to the credit.  The author argues that this bill makes 
          the credit more efficient and only spends the money 
          allocated for the purpose.  The Committee may wish to 
          consider whether there are better ways to create a jobs 
          credit or even if it makes sense to supplant existing 
          credits, such as enterprise zones, with this credit.


          9.   Dr. Frankenstein's Creation  .  As Edward Kleibard, 
          former chief of staff to the Joint Committee on Taxation, 
          recently wrote:  "The tax system is a window into the soul 
          of our society, because we use tax law as our principal 
          tool of industrial policy, wage support and income 
          redistribution. Our tax structure tells more about what we 
          as a society believe to be fundamentally fair than does any 
          other aspect of government."  Applying this quote to 
          California's tax law leads to the conclusion that 
          California is one of the most taxpayer-friendly states in 
          the nation, and one that provides unique benefits to 
          out-of-state firms, in stark contrast to its history of 
          treating all multistate corporations equally.   When 





          SB 116 -- 7/7/11 -- Page 14



          California adopted the elective single sales factor in 
          2008, it departed from every other state save Missouri by 
          allowing taxpayers to choose to use the old formula if it 
          resulted in a lower tax in any given year.  Allowing firms 
          with more property and payroll to benefit from the old 
          formula negates the incentive for them to move more 
          property and payroll to California, thereby reducing the 
          share of its income it has to apportion to other three 
          factor states.  Additionally, an out-of-state firm that 
          mostly or exclusively sells intangibles that apportions 
          under the three-factor, double weighted formula and 
          allocates intangibles under the cost of performance rule, 
          yielding a sales factor close to or equal to zero, enjoys a 
          competitive advantage over a California firm electing 
          single sales factor and allocates intangibles under the 
          market rule because it cannot reduce its sales factor below 
          the percentage of its sales in California. 

          SB 116 proposes two major changes to the rules.  First, all 
          firms must apportion income to California under the single 
          sales factor, except firms can still choose the 
          three-factor, double weighted formula only when they would 
          pay more tax.  Supporters state that this change is 
          preferable because firms can then use more of their accrued 
          tax credits, such as Research and Development Credit, which 
          can't currently be used because they lack the tax liability 
          to apply the credit under single-sales factor, and using 
          those credits allows them to reduce the amount of deferred 
          tax assets on its financial statements.  Never before have 
          apportionment formulas taken credit application into 
          account.  The Committee may wish to consider the merits of 
          structuring California's apportionment formula, the 
          foundation of its corporate tax system, to please some 
          firms and its investors. 

          Second, the measure applies the market rule to all 
          taxpayers, except for cable companies which would have to 
          allocate half of its sales based on that percentage of its 
          sales in California compared to its total sales if it met 
          qualified investment targets.  Generally, tax systems treat 
          should apply the same rules to all taxpayers.  Also, cable 
          companies primarily invest in California to serve customer 
          demand, and have consistently avoided California with its 
          discretionary investments, resulting in its opposition to 
          the market rule and support for the cost of performance 
          method.  The Committee may wish to consider why a separate 





          SB 116 -- 7/7/11 -- Page 15



          set of rules should apply to cable companies.

          10.  Amendments.   The bill is unclear on several items; the 
          author may wish to clarify the following:


                 The cut-off dates for the education credits are 
               unclear.  The language does not specify that the 
               cut-off date would be the quarter that the 
               $1,000,000,000 in credits would be reached.


                 There would be costs incurred to modify systems to 
               track and store the credit information and publish 
               that information.  The costs have not been determined 
               at this time.  


                 The bill language does not specify what agency 
               would be responsible for the administration of the 
               special funds. 


                 The language in Section 25136.1 excludes those 
               taxpayers electing to use the four-factor formula; if 
               their "tax" before credits using the four-factor 
               formula is greater than if they use the single sales 
               factor formula for apportioning business income.  This 
               is not an implementation concern for the FTB, but 
               wanted to point out that it may be confusing to some 
               taxpayers.  



                 The jobs tax credit portion of the bill cuts off 
               claims if (1) the $400 million cap is reached or (2) 
               12/31/2012.  In specifying the cutoff date, however, 
               the bill requires the submission of a timely filed 
               original tax return prior to this date. Since 
               12/31/2012 is the last day of the tax year for most 
               taxpayers, they will be unable to claim the jobs tax 
               credit for tax year 2012. 









          SB 116 -- 7/7/11 -- Page 16





          11.   Been there  .  This bill recalls three four bills this 
          committee has already seen:
                 The Committee approved SB 156 (Emmerson) earlier 
               this year which makes an identical change to the 
               Governor's May Revision proposal.

                 The Committee approved SB 640 (Runner) which enacts 
               a credit equal to $500 for each formerly unemployed 
               person a taxpayer employs.

                 The Committee approved SB (Dutton) which created a 
               sales and use tax exemption for manufacturing 
               products.

                 The Committee approved AB 1195 (Allen) which makes 
               the identical changes to the jobs credit that this 
               bill does as well.


                         Support and Opposition  (7/11/11)
           
          Support  :  Unknown.

          Opposition  :  California Taxpayers' 
               Association.