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Initiative ends break for out-of-state businesses

Initiative seeks to eliminate tax provision that favors companies based outside California

SACRAMENTO, Calif. (AP) -- A ballot initiative funded by a billionaire hedge fund manager is asking California voters to do what Gov. Jerry Brown and Democratic lawmakers have been unable to accomplish — close a corporate tax provision that benefits out-of-state corporations as a way to generate $1 billion a year in revenue to the state.

Tom Steyer, founder of Farallon Capital Management, is funding the Proposition 39 campaign and had contributed at least $22 million by the end of September. He said his initiative on the Nov. 6 ballot is an issue of tax fairness and would act as a step toward stabilizing California's finances.

Opponents argue that repealing the tax break given three years ago would make California less friendly to multistate corporations and threaten existing jobs.

"Fundamentally, it's simply a tax increase," said Dick Thomson, president of the Ventura County Taxpayers Association, which is urging its members to vote no. "We understand as things currently stand, companies have an option in the taxes that they pay. But what this will mean is a $1 billion tax increase on job creators."

Proposition 39 supporters say the loophole is unfair and puts businesses based in California at a competitive disadvantage.

Assembly Speaker John Perez, D-Los Angeles, said in a statement announcing his endorsement of the initiative that it's time to "end a tax giveaway that favors out-of-state companies over our own."

Perez failed in August to close the tax loophole through a legislative vote and use the money for college aid. The Democratic governor also failed to win enough Republican support last year on a similar proposal in exchange for offering incentives for businesses to hire workers in the state.

Under existing tax law, California allows multistate companies to choose between two formulas — one based on their portion of sales in California or one calculated on payroll, property and sales. Out-of-state companies can choose the latter, greatly reducing their tax bill if they have little or no assets in the state.

Proposition 39 would change the law so all businesses — from California-based Intel and Apple to Detroit automakers General Motors Co. and Chrysler — follow the same formula based on the percentage of their sales that are apportioned to the state. The Franchise Tax Board has estimated the change would raise about $1 billion a year.

That tax formula, known as single-sales factor, is used by many other states, including Michigan, New Jersey and Texas, among others. The Legislative Analyst's Office has said that moving to the single-sales factor could result in up to 40,000 more jobs in California.

"In closing this loophole for out-of-state corporations, we get back to something which is fairer," Steyer said. "It doesn't seem right to me that California companies would pay a higher state income tax rate than companies from outside the state on the exact same sales and income."

If voters approve the initiative, Proposition 39 proposes to use the money in two ways. For the first five years, half would go to the state's general fund, much of which goes to pay for public schools, while the rest would be dedicated to retrofitting buildings for energy efficiency.

After that, all the money generated would go to the state's general fund.

"When you fix up a building for energy, you pay lower energy costs over time," Steyer said at the Sacramento Press Club on Sept. 12.

This isn't Steyer's first foray into state politics. He spent millions in 2010 to defeat Proposition 23, which would have suspended the state's landmark greenhouse gas emissions law.

Opponents of Proposition 39, including the California Manufacturers and Technology Association and anti-tax groups, suggest it will make the business climate worse in California because they view it as a tax increase on some corporations. The manufacturers association said businesses will be less likely to invest or expand hiring in the state.

"Prop. 39 raises taxes by $1 billion on California job creators to help fund more government bureaucracy and more bloated pensions," opponents wrote in arguing against the initiative.

They also argue that diverting some of the money to clean energy projects is wasteful when it could be used to fund core services such as schools, health care and public safety. The Legislative Analyst's Office noted that there are currently several state programs aimed at reducing energy consumption.

The tax loophole dates to a late-hour, 2009 budget provision that initially was intended to help make California companies more competitive.

At the time, out-of-state businesses persuaded the Legislature and former Gov. Arnold Schwarzenegger, a Republican, to let all multistate corporations chose between the two tax formulas rather than use only the single-sales formula.

Including the tax formula in the 2009 budget deal was one of the favors Republicans sought so they would put up enough votes to pass a temporary tax increase that has since expired.

Supporters of Proposition 39 say allowing multistate businesses to pick and choose tax formulas favors out-of-state companies that have little property and payroll in California. The campaign says tobacco companies and auto manufacturers were among those who lobbied for the change in 2009.

Supporters of the Steyer initiative have challenged GM, International Paper Co. and Kimberly-Clark Corp. to join Chrysler and Procter & Gamble Co. in pledging not to oppose it. They say the tax option encourages businesses to expand and hire outside California.