California Budget Fix Onerous to Taxpayers

Tax proposals that would have asked some businesses to carry a portion of the tax load were dropped during closed-door negotiations.

For example, Schwarzenegger and Democrats suggested a new tax on companies that extract oil from California, but the plan was resisted by GOP lawmakers who argued that no one industry should be singled out for a tax increase.

The single largest permanent tax break in the budget package is a change in the way California calculates corporate taxes, moving toward a formula referred to as "single sales factor." It will cost the state as much as $750 million a year in revenue.

The formula determines companies' tax liability based on where they make their sales instead of where they operate or employ workers.

A study by the Center on Budget and Policy Priorities concluded there is little evidence to suggest that states retained more jobs and investment when they adopt the single-sales formula. For example, the study found that defense contractor Raytheon Corp. lobbied Massachusetts for the change in 1995 but still sold or closed major facilities.

David Crane, the governor's special economic adviser, defended the shift. He said the argument that companies should pay taxes where they have employees and property is an "old-fashioned notion" because many out-of-state companies sell to Californians.

"The beneficiaries of single sales is labor -- employees -- because companies now have an incentive to retain employees in California," Crane said.