California Budget: Big Business is Only Winner

by Richard Holober, Executive Director, Consumer Federation of California, California Progress Report

This was supposed to be the budget that would have something in it for everyone to hate. It turns out the deal approved yesterday is painful for all Californians – except the big businesses who are celebrating their new tax breaks.

We’ve heard for months that the fiscal crisis left no choice but to cut services and raise taxes to close the $42 billion gap. But this budget does not call on all California taxpayers to share in the sacrifice. The average working family of four will pay an additional $1200 over the next 17 months in increased sales tax, personal income tax and vehicle license fees. At the same time, business gets about one billion dollars in tax breaks.

The worst of the business tax cuts is a permanent change in the formula for calculating the income tax for multi-state and multinational corporations. This produces an initial big business tax cut of about $700 million a year. The State Senate analysis estimates the recalculation will eventually yield a corporate tax reduction – and state revenue loss – of $1.5 billion a year. This is not tax fairness.

Combined with the tax hikes on everyday Californians, it is redistribution of income away from workers and consumers and into the pockets of our state’s biggest businesses. And it provides no tax savings for the mom and pop businesses that we usually count on to provide the camouflage for these corporate welfare schemes.

Similar proposals to change the tax calculations for multi-state and multinational corporations have failed to make it through the legislative process. This year, without the benefit of public hearings and public scrutiny, a permanent tax cut for many of California’s largest businesses was jammed through as part of a budget deal.

Proponents defend this tax break for multinational corporations as an economic ‘stimulus’ that will encourage business to locate or stay in California. There’s scant evidence to back up the myth that marginal tax considerations drive business decisions about where to locate. A 2006 study by the Public Policy Institute of California concluded that business relocations in or out of California – for any and all reasons including taxes along with a myriad of other possible motivating factors – have a ‘negligible’ impact on California’s economy and workforce.

Of far greater importance to California’s future as a high wage state is the availability of a skilled local workforce. The final budget deal cuts education funding for public schools, colleges and universities by more than $11 billion in the 2008-09 and 2009-10 budgets, a sure recipe for diminished prosperity for the next generation of Californians.

How could lawmakers support corporate tax giveaways at a time of devastating cuts to public education and health programs and big tax hikes for working Californians? It’s simple: California is one of only three states that require a two-thirds legislative majority to approve a budget under any circumstances. This rule empowered a small minority of Republican lawmakers to successfully hold the entire state hostage to demands that were unrelated to the budget and that included rollbacks of environmental regulations as well as supersized corporate tax handout.

The budget fiasco has provoked a healthy discussion of the need for governance reform. The starting point for reform should be asserting the democratic principle of majority rule. California must eliminate super-majority requirements that facilitate budget tyranny by a small cabal of extremist lawmakers.