Fact Sheet: Repeal the “Secret” Corporate Tax Loopholes!

by Lenny Goldberg, California Tax Reform Association

Summary:  this proposed initiative repeals only the three new corporate loopholes which were the secret part of the failed budget deals in September 2008 and February 2009.  

None of them have yet taken effect, so the initiative will prevent over $2 billion yearly in future revenue losses. It has been filed with the Secretary of State, pending title and summary.  

The three loopholes are:

Loss carry-backs:  allows corporations to get refunds for taxes already paid to the state when the business takes a loss 2 years later.  If the state’s economy declines and corporations take a loss, they will be able to get a refund for prior taxes just when the state is in worst shape.

    Elective single sales factor:  allows multi-state and multi-national corporations to choose how much income they want to attribute to California. Companies can choose every year which formula they want to use’sales only, or sales, property and payroll’in order to determine the amount of profit they made in California.  So they can attribute more losses or less income, depending on their yearly position, to their advantage and the detriment of the state. 

    Credit-sharing:  allows a corporation which cannot use all the credits they have received to share those credits with parent or affiliated corporations in order to shelter the income of the affiliate.  Multinational pharmaceutical companies are likely to benefit most from this. 

History:  These loopholes were never discussed and never made public until they were passed as part of the budget agreements in September 08 and February 09.  Taken together, they lose $2-2.5 billion in revenue.  They also open up opportunities for endless manipulation of tax liabilities by accountants and attorneys.

They also benefit mostly a handful of multinational corporations with revenues over $1 billion each.  The California Budget Project analyzed who the beneficiaries of each of these loopholes would be, and demonstrated the following:
    *80% of the benefits from elective single sales would go to .01 percent of corporations with revenues over $1 billion. 9 corporations would receive 30% of the benefit, with tax cuts over $20 million for each company.
    *14 corporations with credit sharing would receive over