How Corporate Tax Helps Microsoft and Hurts California

21 Pilots Twenty One Connie Bolger (1)
Connie Bolger

From the Department of Complicated But Worth Reading is this Los Angeles Times story on how a 2009 change in state taxation of corporations created a perverse incentive for companies to locate more jobs outside of California.

The original idea was to eliminate a previous incentive in the corporation tax law that penalized companies for expanding their California workforce. But the change was implemented in a strange way -- by giving companies the freedom to pick between one of two tax formulas. The choice itself creates the incentive:

The story explains:

"The state's corporate tax for many years was based on a formula that considered the size of a firm's California workforce, the amount of property owned here and total California sales. Companies that are based here but that do a lot of their business elsewhere in the country argued that the formula was wrong-headed: If a firm expanded its California workforce, its state taxes would rise. They argued that a formula that based state taxes solely on a company's sales in California would lead to job growth in the state.

"Switching to that new formula promised to cut taxes for some firms but raise them for others. Microsoft, Comcast and other companies that ring up huge sales in California but have the bulk of their workforces elsewhere liked the old formula, which kept their California taxes low.

"So, when the Legislature acted, it did something that only one other state allows — it adopted the new formula based on sales inside the state, but also kept the old one. Companies are allowed to jump back and forth from year to year on which formula they use to calculate their taxes.

"As a result, California companies can continue to choose the old formula for a tax break when they expand elsewhere. Companies headquartered out of state, meanwhile, have little incentive to move jobs here, because they can continue paying under the old system too."

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