If Proposition 24 passes, California will get larger class sizes, fewer teachers and will lose other social service workers and state workers. That’s the prediction by Frank Wells, a spokesperson for the California Teachers Association (CTA).

Proposition 24 repeals tax law that allows multi-state businesses to use a simplified formula to determine how much tax they must pay the state.

Prior to new business tax law approved by the legislator and governor in 2009, multi-state businesses’ taxes were determined by using a formula involving three factors: The value of the business’ properties in California, the value of the business’ compensation to its employees in California, and the value of the business’ sales in California.

This is proposed to change in 2011. Multi-state businesses will be able to choose each year between two formulas, instead of one, to set the level of income California can tax. They can choose from the current “the three-factor formula” or use a portion of their overall national sales in California, aka the “single sales factor.”

Another law approved by the legislature and governor in 2008 will allow carry-backs for state business taxes for the first time, starting in 2011. This law will specifically allow a business to use a net operation loss from 2011 or later to reduce its state taxes for the two years before the net operation loss was generated.

Many of the companies that would benefit from these changes consist of a conglomeration of business entities called unitary groups. This is where divisions operate jointly or under the same management. Additionally, a law approved by the legislature and the governor in 2008 will allow these businesses with available tax credit to transfer unused tax credits to another unit within the group.

These shared tax credits can then be used to reduce taxes in 2010 and later years.

According to Frank Wells, a communications consultant for the California Teachers Association (CTA), a pro-Prop. 24 group, no job-creation requirements are tied to the tax credits and other cuts.

“That is one of our issues. When the legislature gave this break out, there was no stipulation that it would be tied to any job creation or any job creation in California . . .”

If passed, the proposed proposition will eliminate the two formulas and will prevent business entities within a unitary group from sharing tax credits in the future. The proposition would also increase state general fund revenues as a result of increasing the taxes paid by businesses. When fully implemented by 2012-2013, the legislative analysts said general fund revenues would increase by an estimated $1.3 billion each year.

Opponents of Prop. 24 such as Bill La Marr, the executive director of the California Small Business Alliance (CSBA) say that “if the proposition passes, it will adversely affect hit hundreds of thousands of businesses.

“It will hit some larger businesses, too, because it will eliminate tax reforms that have been considered and debated in California for years, before they became law here.”

La Marr added that if Prop. 24 passes, it will eliminate tax reforms that come straight out of what he calls an economics 101 text book, claiming that “it is basic economics. Businesses need incentives to grow, they don’t need dis-incentives. And this is really what Proposition 24 would do.”

According to the CSBA representative, Prop. 24 will deny small businesses the opportunity to take advantage of net operating loss carry-over.

He also contends that should the proposition pass, businesses will think twice about doing the hiring anticipated; or whether they will even to settle here or continue to operate in California.
Wells acknowledges the argument, but isn’t buying it as truth.

“These companies have been here. We have (groups) like Viacom and Hewlett Packard and Sysco–some of the big contributors to the opposition, who are not going to go anywhere over this relatively small thing in terms of the impact on their bottom line tax.”

Wells said there are other things California can do to become more business friendly, but added “this is not one of them, and it is not necessary.”