CTRA’s Statement on tax loopholes in the budget

 Contact:  Lenny Goldberg

 Sept 15, 2008

“Death of the Corporation Tax” is part of the Budget Deal           


In exchange for a small amount of temporary short-term revenues, the Legislature is poised to open two vast new loopholes in the corporation tax, loopholes which will continue indefinitely.  The impact will be to greatly diminish the corporation tax at future costs to education, health care, and public safety. This is a huge giveaway to multinational corporations.


Those loopholes are:

            Net Operating Loss Carrybacks.  In exchange for suspending the ability of corporations to take losses going forward for two years, the budget deal would permit loss carrybacks—the ability to get refunds against prior taxes based on a year’s losses. 


This is nothing but a tax shelter which destabilizes the general fund.  It gives a refund for taxes already paid, with such refunds coming most likely when the economy is in recession. As a result, when we’re making cuts, the state will be cutting refund checks to large corporations. The ability to take losses into the future has been part of tax policy for 20 years, but the legislature has rejected carry-backs for 20 years, because it is nothing but tax manipulation.


Cost:  at least ½ billion per year, but likely more because of the second loophole.


            Exchanging credits among affiliated corporations.  For state tax credits, the state has always insisted that the credits be taken by the corporation that engaged in the activity which is eligible for a credit.  In exchange for limiting corporation tax credits for two years to get short-term revenue, the budget deal opens up the ability of affiliated corporations or subsidiaries to transfer their credits among other corporations—forever! 


There are many billions in unused credits from companies that have not earned sufficient profit to use them.  This proposal will open the ability of companies to effectively sell these credits—e.g. by allowing ownership by another company—so that the billions in unused credits can now be used by profitable corporations. 


Cost:  this could be billions per year and will total many billions over the years. In combination with loss carry-backs it will open the corporation tax to endless manipulation. 


For many years, the corporation tax in California has been one of the most effective in the country, despite the existence of tax credits, because the law and the Franchise Tax Board limited the ability of corporations to manipulate the law to their advantage.


These new loopholes will effectively mean the death of the corporation tax as an effective revenue-raiser.  This deal compromises future generations, and does not even receive any real revenues in return.  Borrowing from the future is bad enough.  Giving away the future to multinational corporations is unconscionable.


 

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