Proposition 39

Removes Mulitistate Business Tax Loophole Resulting In Tax Increase; Funds Schools & Various Energy Projects

We had a tough time getting excited about Proposition 39 – in favor or against.  The proposition seeks to undo a 2009 tax deal, championed by Republican legislators, that allowed Multistate Businesses to choose between two calculations in order to obtain the most beneficial tax treatment for their business. (See this article for more detail on the 2009 tax deal).  Proposition 39 changes the law back to imposing one of the two currently available calculations on all multistate businesses.  This change will likely result in some multi-state businesses paying more tax and some paying less, but the net effect is expected to generate in excess of $1 billion in additional tax revenues for the state.  While the usual suspects (various anti-tax groups) vehemently oppose this tax increase with colorful language and questionable assertions of fact, we have found almost no publicly stated opposition by the actual businesses that would be affected this tax (only one lobby group that purports to speak on behalf of various businesses).  That is important to us because it leads us to believe that either the businesses affected by this tax change are not particularly worried about it, or they are too embarrassed to publicly state their opposition.  Either argument suggests to us that removing the loophole is the right call.

The part we find a bit troubling about this proposition is that after creating a pool of resources by closing one loophole, it then plans to immediately spend nearly all the funds raised.  We’d have liked more of the money to go toward retiring some of the State’s debt.  Instead, for the first five years, the proposition spends about ½ the money on a new “Clean Energy Jobs Fund” (Happily the drafters did ensure that the spending on this fund would not exceed the net anticipated revenues (including likely Prop 98 expenditures) realized from the change in the tax code).  The Clean Energy Jobs Fund would include a new oversight board, but would largely use existing bureaucracies to dispense funds for various projects aimed at making schools and public buildings more energy-efficient and provide job training and workforce development for “clean energy jobs.”  Contrary to assertions made by anti-tax groups opposing Proposition 39, each program funded by the Fund would be subject to audit — an annual audit would review both the Fund and the various projects funded, and overall administration costs could not exceed a modest 4%.

The remaining roughly 50% of funds (after monies paid into the Clean Energy Jobs Fund), however, would not either go into the cash-strapped general fund, or directly to repay debt.  This is because Proposition 98 (passed in 1988) guarantees funding for public schools and community colleges according to a complex set of criteria.  Whenever State revenues rise school funding also automatically rises.  The Legislative Analyst uses an approximation of 40% to estimate the amount of likely Prop 98 funding increases.  That means, Proposition 39 would also generate between about 200-500 million in funding for schools (then roughly doubling after the first 5 years).  Since our schools have lost $20 billion in funding over the last 4 years (translating to between 12-20% in various funding classifications) in an effort to control the state’s growing budget problem (See this source on funding cuts;  See our analysis demonstrating that the school funding problems worsen if Proposition 30 fails to pass or Proposition 38 is not defeated), we can’t really see this additional spending as a negative, it just means we don’t use the money to help with our long-term financial problems.

So, after the Fund gets its money, and the schools get their Proposition 98 money, that leaves about 10-30% of available funds to flow into the state coffers for the first 5 years.  However, after that, once the Clean Energy Jobs Fund ceases to receive funding, the monies flowing to the general fund should similarly increase by about half a billion annually.  Not exactly an immediate avalanche of cash, but under the circumstances we’ll take it.


  1. “Yes” and “No” (and “No”) – PolitoMuse Analyzes California Propositions 37, 39 and 40 « PolitoMuse
  2. GO VOTE — PolitoMuse Offers Complete Analysis on All 11 California Propositions And Selected Local Measures « PolitoMuse

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