BILL ANALYSIS SB 1176 SENATE THIRD READING SB 1176 (Kopp) - As Introduced: March 5, 1993 SENATE VOTE: 28-0 ASSEMBLY ACTIONS: COMMITTEE REV. & TAX. VOTE 6-2 COMMITTEE W. & M. VOTE 14-2 Ayes: Klehs, Caldera, Connolly, Ayes: Vasconcellos, Horcher, Alpert, B. Friedman, Hannigan, V. Brown, Burton, Campbell, Isenberg Costa, Epple, Katz, Jones, Murray, O'Connell, Quackenbush, Woodruff Nays: Ferguson, Johnson Nays: Johnson, Seastrand DIGEST Under existing law, the three-factor apportionment formula: 1) When a corporation operates both within and outside of California, it is necessary to determine what portion of total corporate income is earned in California and is subject to tax in this state. California corporations are required to make this determination using a three- factor formula. 2) Specifically, businesses calculate the percentage of their total property, payroll and sales which occur in California. The average of these percentages is calculated (with equal weight given to each "factor"), and this combined average factor is applied towards a corporation's total income to determine California income. The 9.3% corporation tax rate is then applied to this California income figure to determine the business' tax liability. This is the so-called unitary apportionment method. 3) The three-factor formula, with equal weight given to the three factors which generate income, was adopted by California, and most other states in the 1960's. In recent years, a number of states have varied from this previously uniform formula. This bill: 1) Modifies California's three-factor income apportionment formula so that the sales factor has double the weighting of the property and payroll factors. Thus, rather than an equally-weighted formula, with sales, payroll and property each counted one-third, the new formula would weight the sales factor one-half, and would weight payroll and property one-fourth each. 2) Creates an exception in the formula for businesses that derive more - continued - SB 1176 Page 1 SB 1176 than 50% of their gross income from conducting an "extractive or agricultural" business activity. Businesses meeting this criteria must still use the equal-weighted three factor apportionment formula. 3) Defines extractive businesses as firms engaged in activities relating to the "production, refining, or processing of oil, natural gas, or mineral ore." FISCAL EFFECT State: The Franchise Tax Board estimates that this measure would result in š net General Fund revenue gains of $1 million in 1993-94 and $5 million in 1994-95. This estimate is the net of tax increases totaling in the range of $80 million, offset by tax reductions of a similar amount. Local: None COMMENTS 1) This bill is intended to improve California's business climate by š shifting the corporate tax balance against those "who simply sell into our huge consumer market without putting manufacturing jobs here." Proponents note that several other states have already increased the weight given to sales in their apportionment formulas, and that California's failure to do so places California manufacturers at a competitive disadvantage. 2) There are 25 other states that use an apportionment formula that at least provides an option to certain taxpayers to place an additional weight on the sales factor relative to property and payroll factors. The following list shows these states, and the weight given to sales. Arizona 1/2 Minnesota 70% Colorado 1/2 or 1/3 Missouri 1/3 or 100% Connecticut 1/2 Nebraska 100% Florida 1/2 New York 1/2 Illinois 1/2 North Carolina 1/2 Indiana 1/2 New Mexico 1/3 or 1/2 Iowa 100% (manufacturers only) Kansas 1/2 or 1/3 Ohio 1/2 Kentucky 1/2 Oregon 1/2 Maine 1/2 Texas 100% Maryland 1/3 or 1/2 West Virginia 1/2 Massachusetts 1/2 Wisconsin 1/2 Michigan 40% New Hampshire 43% (Under this bill, California's formula would show a 1/2 weight for sales.) FN 004831 - continued - SB 1176 Page 2