California’s unfriendly business climate

By Brenda Servin |Staff Writer|

California was ranked 48 on the State Business Tax Climate Index for 2014.
This is the fifth year in a row that California was ranked 48th.
States are ranked by the index and can either rise or fall in ranking based on reforms or changes within the state and in other states.
According to the Tax Foundation, “The State Business Tax Climate Index, now in its 10th edition, collects data on over a hundred tax provisions for each state and synthesizes them into a single, easy-to-use score.”
Professor Eric Nilsson at CSUSB specializes in the fields of econometrics, labor economics, political economy, and economics and philosophy.
Nilsson believes that the tax rates could hinder business growth.
“The higher tax rates might permit the state to provide services that actually attract more businesses to the state,” said Professor Nilsson.
The corporate income tax between California and Wyoming illustrates the gap between states in the top ten and the bottom ten of the State Business Tax Climate Index.
California has a flat rate corporate income tax of 8.84 percent compared to Wyoming, which was scored number one on the State Business Tax Climate Index and has no corporate income tax.
Even though California has made improvements to its corporate income tax code, such as Proposition 39, it has held the 48th position since 2009.
In the 2012 election, Californians voted in favor of Proposition 39, which prevented corporations from having a choice on how to be taxed.
Originally companies were given the option between either the Three-Factor Formula or the Single-Sales Factor system.
The Three-Factor Formula system used in-state property, employees and the corporation’s sales to base the corporate income tax off of, while the Single-Sales Factor system based corporate income taxes only on the in-state corporate sales.
The California Franchise Tax Board has determined that a “corporation or limited liability company treated as a corporation receives income from sources within California but is not doing business in California” is subject to the corporation income tax.
Out-of-state or multi-state companies that chose the Three-Factor Formula benefited from the fact they had little or no properties within the state.
Both the Three-Factor Formula and Single-Sales Factor systems allowed for corporations to pay less in corporate income taxes.
According to Fordham Corporate Law, Proposition 39 “requires out-of-state businesses to calculate their California income tax liability based on the percentage of their sales in California”.
In addition, Proposition 39 will increase revenue that will be used toward projects that will create clean and energy efficient jobs.
CSUSB student, Evelyn Romero said, “It was a good decision to replace the Single-Sales Factor and Three-Factor Formulas with Proposition 39 so companies don’t take advantage of the California market place”
One advantage of having high-end income tax rates is that states have the opportunity to close budget gaps with the revenue they produce through these taxes, according to the Center on Budget and Policy Priorities.
Nilsson added that “some businesses might leave, but other businesses replace them because CA has a huge (and relatively high income) market that businesses love.”
Despite the high tax rates California continues to attract businesses and their revenue.