Fail: 3,939,118 / 41.9% Yes votes ...... 5,461,674 / 58.1% No votes

See Also: Index of all Propositions

Summary Prepared by the State Attorney General:

• Repeals recent legislation that would allow businesses to shift operating losses to prior tax years and that would extend the period permitted to shift operating losses to future tax years.
• Repeals recent legislation that would allow corporations to share tax credits with affiliated corporations.
• Repeals recent legislation that would allow multistate businesses to use a sales-based income calculation, rather than a combination property-, payroll-, and sales-based income calculation.

Fiscal Impact from the Legislative Analyst:

Increased state revenues of about $1.3 billion each year by 2012-13 from higher taxes paid by some businesses. Smaller increases in 2010-11 and 2011-12.

Meaning of Voting Yes/No

A YES vote on this measure means:

Three business tax provisions will return to what they were before 2008 and 2009 law changes. As a result: (1) a business will be less able to deduct losses in one year against income in other years, (2) a multistate business will have its California income determined by a calculation using three factors, and (3) a business will not be able to share tax credits with related businesses.

A NO vote on this measure means:

Three business tax provisions that were recently changed will not be affected. As a result of maintaining current law: (1) a business will be able to deduct losses in one year against income in more situations, (2) most multistate businesses could choose to have their California income determined based only on a single sales factor, and (3) a business will be able to share its tax credits with related businesses.

BACKGROUND

This proposition would change three provisions of California's laws for taxing businesses. As indicated below, these provisions have been changed recently as part of state budget agreements between the Legislature and the Governor. Under current law, all of these recent changes will be in effect by the 2011 tax year.

Businesses' Use of Financial Losses. Under federal and state tax laws, in a year when a business has more deductible expenses than income, the business has a net operating loss (NOL). A business with an NOL in one year generally can use it to reduce its taxes when it makes a profit in some later years. This is known as a "carryforward" of losses. Federal tax law also allows businesses to "carry back" losses. In other words, federal law allows a business to use an NOL from one year to reduce its taxes in an earlier year. These mechanisms--both carryforwards and carrybacks--have been put in place to recognize that business income and/or expenses can vary significantly from year to year.

A law approved by the Legislature and the Governor in 2008 allows carrybacks for state business taxes for the first time, starting in 2011. Specifically, this new law will allow a business to use an NOL from 2011 or later to reduce its state taxes for the two years before the NOL was generated. For example, a business that had profits and paid taxes in 2009 but has a loss in 2011 may deduct its 2011 NOL against its 2009 taxable income. The business would file an amended tax return for 2009 and receive a tax refund. In addition, the 2008 law extends the carryforward time allowed from 10 years to 20 years.

Determination of Income of Multistate Businesses' Taxed by California. Businesses often operate in many states. To determine how much of the income of a multistate business is taxed by the state, California law now uses a formula that involves three factors:

• Property. The value of the business' properties in California compared to the value of its properties throughout the nation.
• Payroll. The value of the business' compensation to its employees in California compared to the value of its compensation to its employees throughout the nation.
• Sales. The value of the business' sales in California compared to the value of its sales throughout the United States. (For most businesses, this factor counts more heavily than the others.)

Ability of Businesses to Share Tax Credits. California tax law allows tax credits that can reduce a business' taxes. If, for example, a business is able to use tax credits worth $1 million, this reduces the business' state taxes by $1 million. These tax credits are given to businesses doing certain things that the state wants to encourage. For example, a business that spends money in California to develop a new technology product may earn a "research and development" tax credit. If a business has credits which exceed the amount of taxes it owes in a given year, it will have unused credits. (Typically, these unused credits can be carried forward to be used in future years.)

Many business organizations consist of a group of business entities. This is called a "unitary group" if it meets certain conditions, such as operating jointly or operating under the same management. For example, one business in a group may develop a product, and another business in the group may sell that product. Tax credits are given to individual business entities--not unitary groups.

A law approved by the Legislature and the Governor in 2008 allows a business with available tax credits to transfer unused tax credits to another business in the same group. Shared credits can be used to reduce taxes in 2010 and later years. There are certain limitations to this credit sharing in the law. Some of these credits have been transferred already.

PROPOSAL

This proposition repeals the business tax law changes passed in 2008 and 2009 described above. As such, this measure would return tax policies in these areas to the way they were prior to the recent law changes. The effects of this proposition are summarized in Figure 1.

Restricts Ability of a Business to Use Operating Losses to Lower Taxes. This proposition prevents a business from using an NOL carryback to reduce its taxes for previous years. Businesses could still use NOLs to reduce their taxes in future years--though they would have 10 years to use each NOL, rather than 20 years.

See Figure 1 (click here and scroll down to view) Effects of Proposition 24 on California Business Tax Law

Ends Ability of a Multistate Business to Choose How Its California Income Is Determined. This proposition eliminates the option that multistate businesses will have to choose between two formulas to determine the portion of their income subject to California state taxes. Instead, businesses' taxable income in California would continue to be determined based on the formula currently in use which considers businesses' sales, property, and payroll. (The tax law used for businesses that only do business in California would be unchanged by this part of the proposition.)

Ends Ability of a Business to Share Tax Credits Within a Unitary Group. This proposition prevents business entities within a unitary group from sharing tax credits in the future. (While it is not certain, it appears that businesses would be able to use tax credits that already have been transferred to them.)

Arguments Submitted to the Secretary of State

Summary of Arguments FOR Proposition 24:

Prop. 24 stops $1.7 billion in new special tax breaks for wealthy, multi-state corporations. They get unfair tax loopholes without creating one new job while small businesses get virtually no benefit. Public schools, healthcare and public safety should come before tax loopholes. Vote YES on 24--the Tax Fairness Act.

Summary of Arguments AGAINST Proposition 24:

CALIFORNIA NEEDS JOBS, NOT A JOBS TAX! Prop. 24 doesn't guarantee $1 for our classrooms and REDUCES long-term revenues for schools and vital services. It would hurt small businesses, tax job creation, send jobs OUT of California--costing us 144,000 jobs. Families can't afford 24's new taxes. No on 24!

Contact FOR Proposition 24:

Yes on 24, the Tax Fairness Act sponsored by the California Teachers Association
Richard Stapler
1510 J Street, Suite 210
Sacramento, CA 95814
(916) 443-7817
http://www.YESPROP24.ORG

Contact AGAINST Proposition 24:

No on 24--Stop the Jobs Tax, a coalition of taxpayers, employers, small businesses, former educators and high tech and biotechnology organizations
111 Anza Boulevard, #406
Burlingame, CA 94010
(800) 610-4150
info@StopProp24.com
http://www.StopProp24.com

Video Overview

• Analysis of the Ballot Measure - produced by LWV Cupertino-Sunnyvale (3 min video)

Secretary of State

• Full Arguments and Rebuttals
• Full Text of Proposed Law [PDF]

• Full Impartial Analysis of this Measure

League of Women Voters of California Education Fund

• Pros and Cons - A nonpartisan explanation of this state proposition, with supporting and opposing arguments
• Easy Voter Guide - A brief summary of this state proposition

• Forum - KQED San Francisco - A debate on the proposition hosted by Michael Krasny (9/16/10, 28 min)
• KQED State Proposition Guide - A succinct summary of the proposal, background and arguments for and against

• In-Depth Analysis of this Proposition - Prepared by Institute of Governmental Studies at UC Berkeley
• Table of Endorsements For or Against this Proposition - Convenient display of nonprofit organizations, unions, newspapers, political parties and gubernatorial candidates
• Proposition 24: Should The State Reverse Recent Business Tax Breaks To Move The Budget Toward Balance? - A CBP Budget Brief provides an overview and assesses the potential impact on the state budget [PDF]

Secretary of State

• Cal-Access Database - Who contributes money and how is it spent

• Follow the Money - Top 5 Donors - Convenient summary of largest donors in support and opposition