February 11, 2014


Corporate tax reform: California points the way (Bill Parks, FEBRUARY 10, 2014, Reuters)

Passed by 61 percent of voters in a November 2012 state referendum, Proposition 39 requires a "single sales factor" corporate income tax. Corporate tax collections are predicted to increase by about $700 million per year.

Prop 39 taxes every corporation that sells goods and services in the state -- treating U.S. and foreign corporations the same. The state taxes a portion of each corporation's U.S. earnings based on a simple percentage: total sales in California divided by total U.S. domestic sales. By basing the tax calculation on in-state sales, businesses can no longer use various schemes to make it appear that profits were earned out of state.

Calculating what every company owes with the single sales factor is simple and addresses the "what if's" listed above. This is a big improvement over the devil's bargain that allowed corporations to choose how they were taxed.

The U.S. tax system now requires authorities to keep track of where American companies run their operations and where they make their profits. Companies are taxed more if they operate in the United States -- which encourages many to shift assets abroad. In addition, Washington lets companies defer taxes on profits from business outside the country, but allows them to write off expenses immediately.

If our federal tax code was amended along the lines of California's Prop 39, we could stop this absurd money chase. Every multinational corporation (foreign and domestic) selling products and services in the United States would still want to sell in the world's biggest consumer market. They would also continue to release accurate information about -domestic sales because they would want to reward shareholders with the returns from selling in the U.S. market. We would simply tax the percentage of their global profits represented by their U.S. sales.

Adapting the California tax system for the nation would make U.S. businesses competitive in global markets, without rewarding companies for moving production and assets abroad. It would also help smaller domestic firms compete with large multinationals that now pay little or no corporate taxes.

By no longer trying to tax companies based on whether they have U.S. operations and employees, we could eliminate some of the disincentives that our current tax system imposes on domestic manufacturing and employment. Jobs, factories and profit centers could return here. And we would bring in more tax revenue from foreign companies that sell in the United States, but now get a free ride.

By taxing foreign companies on the Toyotas or TVs they sell in the United States, a sales-based system would bring in more money from a broader base. Judging by Prop 39's more than $1 billion in additional tax revenues, it is logical to conclude that increased revenues from a similar national system could make it possible to lower the overall corporate rate while still raising more funds for reducing the deficit and investing in the economy -- giving liberals and conservatives something to cheer about.

Posted by at February 11, 2014 6:37 PM

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