Is Sales Tax Tax Deductible on California Income Tax

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 An Informational Hearing
 Wednesday, February 27, 2008
         Room 3191

Table of Contents
Introduction                                               2
Selected Tax Expenditures                                  10
Expenditure Review                                         11
Research and Development Credit                            11
Mortgage Interest Deduction                                12
Geographically Targeted Economic Development Areas         13
Rice Straw Credit                                          15
Low-Income Housing Tax Credit                              16
Enhanced Oil Recovery Credit                               17
Household and Dependant Care Credit                        18
Farm Credits (including sales and use exemption for farm   20
equipment and diesel fuel)
Depreciation Beyond Economic Depreciation                  22
Percentage Depletion of Resource Allowance Deduction       23
Ultra-Low-Sulfur Diesel Fuel Environmental Credit          24
Double-Weighted Sales Apportionment Formula                25

Department of Finance defines a tax expenditure as a ―deduction, exclusion, exemption,
credit, or any other tax benefit as provided by the state.‖

As California faces another fiscal imbalance, policymakers are increasingly interested in
state tax expenditures, their underlying goals and objectives, as well as their efficacy.
When policymakers institute new tax expenditures, the state agrees to forego tax
revenues in the hopes of providing increased equity in the tax system or seeking to
change private investment behavior. California foregoes approximately $50 billion per
year. The Committee prepared this review to help policymakers evaluate the
effectiveness of current tax expenditures. This introduction seeks to determine a useful
definition for tax expenditures, describes the standard models for tax expenditures, lists
some of the motivations for enacting them, and discusses analytical barriers to tax
expenditure review before analyzing 13 selected tax expenditures.

Because state law requires the Department of Finance (Finance) to report to the
Legislature regarding all tax expenditures, Finance had to choose a definition upon which
to base their report. Finance notes that its definition above excludes progressive rate
structures, tax reductions that affect all taxpayers in a similar fashion, tax expenditures
authorized by the federal government or the California Constitution, penalties, interest,
and the application of sales tax to intangible personal property.

Franchise Tax Board’s (FTB) definition, issued as part of its ―California Tax
Expenditures: Compendium of Individual Provisions,‖ relies in part on the definition
accepted by the Joint Committee on Taxation and complements Finance’s choice by
calling tax expenditures ―any revenue loss attributable to a special exclusion, exemption,
or deduction from gross income or which provide a special credit, a preferential rate, or
deferral of liability.‖ FTB notes that the term ―tax expenditure‖ also implies that the
policy choice underlying the tax expenditure could be implemented in a different way.

Before evaluating tax expenditures, the term must be defined. We depend on the
Department of Finance’s technical definition but there are also definitions based on
varying philosophies. For example, some define tax expenditures as public subsidies to
specified industries or geographic areas whereas some believe that reducing any tax will
put more money back into the hands of taxpayers where it will be spent more efficiently.
Still others believe that non-tax measures more readily accomplish the objectives of
raising aggregate demand, employment and output thereby stimulating the economy.
Others counter that private sector investment of tax breaks will provide superior public
benefits than would have been made had an identical amount been collected and spent by

The Committee shall use the Department of Finance’s definition because it serves as the
foundation for a well-known and commonly accepted report and strikes a sensible
balance between competing definitions arising from divergent ideologies regarding tax
policy issues.

In California, the Legislature enacted tax expenditures for sales and use taxes, personal
income taxes and corporation taxes. Tax expenditures related to property taxes cannot be
included because they must be authorized in the California Constitution and therefore fall
out of Finance’s definition. The Committee determined that no tax expenditures within
the state’s excise or special taxes were significant enough to merit review.

For Personal Income and Corporation Taxes, tax expenditures can be income exclusions,
expense deductions, or refundable or non-refundable credits.

1. Exclusions

Exclusions provide that income from an enumerated source cannot be included as income
for tax purposes. The most famous of these in California law is the exclusion of Social
Security benefits from income. Contributions made from wages up to a certain amount to
an Individual Retirement Account receive similar treatment. Taxpayers pay taxes at the
marginal rate based on their remaining income after excluding the Social Security
benefits or IRA contributions.

Higher-income taxpayers may benefit more than lower-income taxpayers from
exclusions;, high-income taxpayers who earn in excess of $1 million have a 1% higher
marginal rate than a taxpayer whose income drops below $1 million in income per year
(Proposition 63 1% surcharge threshold), and dropping from the second top bracket to the
third top bracket reduces the marginal rate from 9.3% to 8% of income, although the
marginal rate spreads increases to 2% between four of the lowest brackets. Exclusions
mean less to lower income people because they may not have a filing requirement or their
marginal rates are much lower under California’s progressive income tax structure.

2. Deductions

Taxpayers deduct expenses incurred for certain activities or purchases up to a certain
amount from their California Adjusted Income. A popular deduction for Californians is
for the interest paid on a home mortgage – a deduction also allowed under federal law.
State law gives taxpayers a choice - either itemize deductions or take the standard
deduction. Taxpayers choose based on whether their deductible expenses (business

expenses, higher education expenses, mortgage interest, etc.) exceed the standard
deduction ($5,000 single/$10,000 married for California).

Taxpayers who itemize deductions (those who have enough qualifying deductions to
exceed the standard deduction) can take advantage of specified deductions but taxpayers
who only take the standard deduction cannot. Many deductions primarily benefit more
affluent taxpayers because they are likely to itemize deductions and are able to deduct
income subject to higher marginal rates.

3. Credits

Tax Credits directly reduce taxes due, which is determined by multiplying adjusted
income by the appropriate marginal rate. Tax credits are often based on a percentage of
the costs incurred for making specified investments such as California’s Research and
Development Tax Credit. Tax credits are either non-refundable and enacted by a
majority vote of each house of the Legislature, meaning that the value of the credit
reduces tax due until equal to zero, or, refundable and enacted by a 2/3 vote, which
requires the state to refund the remaining value of the credit after tax due is reduced to
zero. Currently, California has only one refundable credit: the childcare credit. The most
notable refundable credit, the renter’s credit, existed in the past as refundable and is now
non-refundable. Non-refundable credits rarely help lower-income taxpayers and motion
picture productions because they pay little to no tax to offset the value of the credit. The
more income (and therefore tax due) a taxpayer has, the more a taxpayer can make use of
non-refundable credits.


California law requires the payment of sales and use tax on tangible personal property
that is sold or used in the state. Sales tax applies when an item is purchased within the
state’s borders; use tax applies when an item is purchased outside the state but is used in
California. Sales and Use Tax does not apply to intangible property, nor does it apply to

The Legislature enacted several sales and use tax exemptions for items that would
normally qualify as tangible personal property. The exemptions apply for items as
significant to the average family as food and prescription medication and to items with
significantly fewer affected taxpayers, such as poultry litter and component parts of
railroad cars. Many of these exemptions are intended to reduce the price of goods seen as
necessities of life by eliminating the sales tax liability while others mean to benefit
certain industries. Occasionally, the Legislature chooses to treat certain organizations as
consumers instead of resellers for sales tax purposes, thereby removing the responsibility
to collect and remit sales taxes.

Tax expenditures are one tool available to policymakers to try and address complex
problems. Policymakers can significantly change economic signals and calculations by
altering tax law. According to the FTB, policymakers enact tax expenditures to eliminate
inefficiencies or inequities in existing tax law or to provide an incentive for a change in

California law contains many tax expenditures to help remedy existing inequities.
Exempting food from the sales tax may not change an individual’s behavior (except
possibly choosing to carry a meal back to your office instead of eating at the local deli),
instead, food is a basic human necessity and applying a sales tax necessarily increases a
basic cost of living, especially for those whose spending on food represents a significant
portion of their income. Similarly, allowing an additional exemption of income for the
blind seeks to ameliorate or compensate for the additional difficulty of earning that
income compared to those who are not blind.

Tax credits are also powerful financial incentives. Allowing taxpayers to deduct the
interest on home mortgages is a powerful financial subsidy for Americans to buy homes.
Other tax credits seek to affect private economic decisions in a more subtle way – by
changing the cost-benefit calculation to include positive societal benefits. For example,
California’s Low-Income Housing Tax Credit (LIHTC) seeks to enhance the
attractiveness of low-income housing projects to investors who have many choices to
allocate investments. While the return of capital for low-income housing may not be as
attractive to investors when compared to other possible investments, the LIHTC provides
a tax benefit that seeks to draws more investment into a needed and socially beneficial
product – more housing for low-income Californians.


Tax expenditures are both financial investments and policy instruments. Analysts must
develop frameworks to evaluate tax expenditures using both equity and efficiency
considerations, however, significant disagreement exists regarding the method to evaluate
both the fiscal and policy impacts of tax expenditures.

1. Fiscal

Tax expenditures result in reduced revenues with the implied argument that the foregone
revenue from the tax expenditure will result in net positive benefits to the public that are
superior to the same amount of revenue spent on other public services. However,
significant disagreement exists regarding how to measure benefits and costs, with
advocates for business interests arguing for dynamic revenue estimation, which attempts
to model enhanced economic activity and government revenues resulting from tax
expenditures, versus static revenue estimation models, which measure foregone revenue
by directly looking at how tax due for firms and individuals changes as a result of tax

In California, both static and dynamic revenue models exist. FTB estimates the foregone
revenue amount of tax expenditures by looking at returns filed by taxpayers, and
estimates the effect of proposed tax expenditures by calculating an anticipated revenue
loss by modeling taxpayer behavior based on past returns. Because FTB may uniquely
use taxpayer records to determine foregone revenues, their estimates are often regarded
as the most accurate given available information.

Advocates for business interests argue that static estimates do not calculate the positive
economic benefits resulting from tax expenditures, which can offset the static costs
measured by FTB’s current estimation methodology. Dynamic models are complex
mathematical instruments that attempt to measure the effect of law changes by estimating
secondary changes to economic behavior. For example, the dynamic model would
estimate the economic effect of gasoline refineries likely laying off workers if the
Legislature approved a higher gasoline excise tax rate because purchasers would buy less
gasoline at the tax-induced higher price. The model could also guess whether other firms
paying more for gasoline would pay less income tax or reduce payroll.

SB 1837 (Campbell, 1994) required Finance to use dynamic models to estimate the effect
of legislation with a fiscal impact exceeding $10 million. Finance, together with the
Legislative Analysts’ Office, contracted with the University of California at Berkeley to
develop California’s dynamic revenue model. The model attempted to estimate the
secondary effects of tax law changes; numerous equations sought to describe complex
interconnections in California’s economy. However, the model determined that the most
optimistic gains from tax expenditures only provide a maximum 20% offset to the static
revenue loss. Finance ceased using the model and advocates for business interests
continue to argue that tax expenditure do pay for themselves.

2. Policy

Estimating the policy effects of tax expenditures poses both an epistemological and
empirical problem. Tax expenditures attempt to change private decision making by
providing a financial incentive that alters a taxpayer’s cost-benefit calculation. Enacting
a tax expenditure results in some taxpayers receiving a benefit for something they likely
would have done anyway – responding to more significant economic realities than tax
expenditures, known in economic nomenclature as ―deadweight loss.‖ Tax expenditures
may also spur others to act on the incentive when they wouldn’t otherwise have but for
the tax expenditure. While determining a balance between these two sets of taxpayers
would serve as a useful evaluation of the tax expenditure’s effectiveness, how does one
know that the tax expenditure actually changed decision-making? The Legislature has no
way of knowing with any certainty. Even if the information were collected, taxpayers
would have a significant financial incentive to say they changed behavior because of the
tax expenditure. The Legislature would have no way of verifying the information.

Sometimes aggregate data can shed light on tax expenditures - several studies show that
Enterprise Zones have lower poverty and unemployment rates than areas with similar

economic and demographic factors that are not designated as Enterprise Zones.
However, when taxpayers could claim California’s Manufacturers Investment Credit,
employment data showed that manufacturing jobs in California actually decreased, then
rebounded after the credit expired – showing that more significant economic realities had
greater effect on manufacturing in California than the tax credit.

In the absence of other tools, evaluating tax expenditures reverts to a ―first principles‖
economic analysis - lowering input costs by reducing taxes due raises quantity supplied;
broad bases and low rates lead to more stable and predictable revenues, especially over
the long run; lower tax jurisdictions will attract industries with mobile capital all else
being equal. One can make semi-informed guesses about effectiveness by looking at how
many taxpayers claim the tax expenditure – if few taxpayers avail themselves of the tax
expenditure, the aggregate economic effect will be small. Also, the policy design of the
tax expenditure may also provide some insight into its effectiveness. Geographically
Targeted Economic Development Area tax credits (such as Enterprise Zones) ostensibly
seek to increase economic opportunities for hard-to-hire individuals and assist and attract
businesses to economically challenged areas, however, because of vague statutes, and an
enterprising cottage industry of consultants, the program has little to no incentive effect
in practice as a result.


Although few studies exist on the direct impact of investment tax credits on investment,
there have been a variety of econometric and statistical techniques used in these
investigations. Generally, these studies concluded that investment tax credits have only
small or undetectable effects on investment. One reason why tax credits are found to have
little impact may result from the benefits of such credits being passed ―up‖ to producers
of inputs and ―down‖ to employees, as opposed to showing up as increasing investment.
In fact, evidence has shown that investment tax credits can lead to higher input prices and
wages at least in a short or intermediate term. The following study methodologies and
results bear mentioning:

Tax Credits and the “User Cost of Capital.” A number of studies attempt to assess the
effectiveness of tax credits by looking at the impact of tax credits on the ―user cost of
capital.‖ One recent study concluded that (in line with previous cost of capital studies) it
was unlikely that state and local tax policies have had a substantial effect on the variation
in state-specific levels of investment.

After-Tax Rate of Return on Capital. Other studies have looked at representative
manufacturing, communications, retail, and business services firms. One study of six
Midwestern states found investment tax credits had only a small impact on the rate of
return. Since business investment decisions are often based on rates of return, this result
would suggest that tax credits may have little impact on investment.

Tax Credits and Business Location. Another recent study looked at investment decisions
in 22 northeastern states by representative firms in various industries. The study

concluded that the business tax structure of a state exerts a small or negligible effect on
capital expenditures, with other economic and demographic characteristics of states
exerting a larger influence.

Ratio of Capital to Labor. Economic theory suggests that a decrease in the cost of
capital—relative to labor costs—would generally result in an increase in the capital/labor
ratio. The capital/labor ratio approach is based on the assumption that if tax credits aimed
at investment in equipment and machinery are effective, the capital/labor ratio will
increase in the presence of such credits. However, a 1995 study of the federal investment
tax credit found the ratio to be unaffected by tax credits.

Tax Comparisons. This approach is based on comparing the effect of changes in various
types of business taxes. One study found that sales tax exemptions and changes to income
tax apportionment formulas had a greater impact on investment than reductions in other
tax changes that result in decreased corporate tax burdens (such as accelerated
depreciation or reduced tax rates). This suggests that tax changes are not equal in their
ability to stimulate economic activity.

A substantial amount of economic development research has attempted to measure the
public cost per job created. Most studies have shown these costs to be significant, with
evidence generally consistent with the belief that economic development subsidies are
likely to be associated with substantial net costs per job.

One recent study estimated the average public cost per manufacturing job generated by a
tax incentive in 17 states, including California. The states were chosen based on high
levels of manufacturing production and a decline in effective corporate tax rates from
1990 through 1998. The loss in state and local revenue per job, over a 20 -year period,
was estimated to equal $46,000 on a net present value basis. The study also looked at the
impact of the increased economic activity on state revenues and concluded that over the
same 20-year period additional revenues of $18,000 in net present-value terms would be
collected. In each year revenue reductions were greater than revenue increases. Other
studies have reached similar conclusions regarding job costs. It should be noted that even
with such costs associated with job creation, policymakers may decide that a job-creation
policy is appropriate. This may be due to the perceived advantages of making overall
employment larger even at the expense of state revenues.

Selected Tax Expenditures

The Committee selected expenditures based on usage, revenue impact, potential for
legislative change, popular attention, illustrative value, and to balance out the
Committee’s review generally.

The Committee selected 12 tax expenditures for review:
      1.      R&D credit
      2.      Mortgage Interest Deduction
      3.      Geographically Targeted Economic Development Areas
      4.      Rice Straw Credit
      5.      Low-Income Housing Tax Credit
      6.      Enhanced Oil Recovery Credit
      7.      Household and Dependant Care Credit
      8.      Farm Credits (including sales and use exemption for farm equipment and
      diesel fuel)
      9.      Depreciation beyond Economic Depreciation
      10.     Percentage Depletion of Resource Allowance Deduction
      11.     Ultra-Low-Sulfur Diesel Fuel Environmental Credit
      12.     Double-Weighted Sales Apportionment Formula

Each review will describe each tax expenditure, list its location in the Revenue and
Taxation Code, identify potential complements and overlaps with other tax expenditures,
show its revenue effect and number of tax returns affected, approximate the beneficiaries
of the tax expenditure and discuss the tax expenditure including the externalities (the
positive or negative impact associated with an economic transaction on any party not
involved in the transaction) associated with it, point out recent legislation proposing
changes to the tax expenditure, and analyze the policy and fiscal effects of the tax
expenditure. The final draft of this document will include possible alternatives or
recommendations to change the tax expenditure.

Expenditure Review
RESEARCH AND DEVELOPMENT TAX CREDIT                                            (R&T Code
§17052.12 and §23609)

Federal law provides research and development tax credits to encourage companies to
increase their research and development activities. Research expenses must qualify as an
expense, be incurred in the United States, and be paid by the taxpayer. Additionally,
research must discover information technological in nature, involve experimentation, and
intended to develop a new or improved business component, among other requirements.

Congress recently extended research and development credits, created the alternative
simplified credit, and increased the alternative incremental credit rates. Currently, federal
law provides three research and development tax credits:
    A research credit equal to 20% of the incremental amount of qualified research
        and development costs that exceed its base year amount; a product of the
        taxpayer’s fixed-base percentage and average gross receipts for the four years
        before the taxpayer takes the credit. This credit rewards firms that increase their
        research and development expenses over their previous efforts. California
        conforms to this credit for research conducted in California, except at a lower rate
        of 15%. California also offers corporate taxpayers a basic research payment
        credit for university and hospital-based research of 24%.
    An alternative simplified credit equal to 12% of research expenses that exceed
        50% of the average research costs for the three preceding taxable years.
    An alternative incremental credit equal to the sum of an increasing percentage of
        the amount of qualified research and development costs in excess of a percentage
        of the base amount, defined as the average gross receipts for the last four years
        divided into three tiers:
            o 3% (formerly 2.65%) of expenses between 1% and 1.5% over the base
                amount. California allows a credit equal to 1.49% of these research
            o 4% (formerly 3.2%) of expenses between 1.5% and 2% of the base
                amount. California allows a credit equal to 1.98% of these costs.
            o 5% (formerly 3.75%) of expenses exceeding 2% of the base amount.
                California allows a credit equal to 2.48% of these costs.

State law conforms to federal law, except at the lower percentages listed above.
California research credits may not be combined with other credits and may not be
transferred to another taxpayer or taken by a subsidiary within the unitary group.


Research and development creates broad positive externalities – innovation leads to
manufacturing and its positive economic benefits, provides jobs for highly educated and
upwardly mobile individuals, and leads to a wider range of consumer products.
Subsidizing research and development likely leads to a better quality of life that exceeds
the foregone revenue needed to fund the credit. While the federal credit provides an
incentive for U.S. Companies to invest in research and development, the state credit
encourages firms that engage in research and development to do so in California.
However, California’s R&D Credit may not benefit all firms that invest in innovation
because the credit can only be allocated to the specific subsidiary engaged in Research
and Development in California after intrastate division of income and expenses, and the
credit cannot be shared amongst the members of the unitary group. The remaining
subsidiary that actually performs the research and development may not have sufficient
income left after apportionment to offset the credit.

Losses to the state of $919 million in 2007-08 (est.).

Recent Legislation
SB 98 (Committee on Budget) and SB 928 (Harman) increased alternative incremental
credit percentages to the levels recently adopted by Congress.

conforms to IRC §163)


California law allows a taxpayer to deduct mortgage interest expenses from income when
calculating California income. Qualified mortgage interest includes mortgage interest
incurred in acquiring, constructing, substantially improving, or refinancing the principal
residence of the taxpayer and one other residence (i.e., vacation home) as well as interest
on home-equity borrowing secured by the residence. Federal law also allows a similar
deduction, and is only available to taxpayers who elect to itemize deductions.

For purchasing, constructing, or improving a home, only interest paid on the first one
million dollars borrowed ($500,000 for married individuals filing separate returns) may
be deducted. On home-equity loans, interest on the first $100,000 borrowed ($50,000
married, filing separately) may be deducted. Home equity loans must be secured by a
qualified residence and may not exceed the fair market value of the residence reduced by
any outstanding debts incurred in the process of purchasing or constructing the home.
Interest on home equity loans is deductible regardless of whether the taxpayer uses loan
proceeds to improve the home.


Policymakers designed the mortgage interest deduction to help individuals realize the
goal of homeownership by providing a significant tax incentive to purchase a home.
However, a recent report by he Legislative Analyst’s Office (LAO) cites a number of
concerns with the Mortgage Interest Deduction and suggests that the deduction may not
be meeting its goals and that it creates other results that would not otherwise occur in a
normally-functioning home market.

The LAO report says:

   o While the deduction reduces the cost of housing and increases its rate of return as
     an investment, its effect on homeownership rates is not clearly positive, and
     therefore unclear, especially combined with other housing policies because other
     states without a deduction have higher ownership rates than California. LAO
     suggests that the mortgage interest deduction does not increase ownership rates,
     but merely may allow individuals to purchase larger and fancier homes
   o The deduction provides benefits as incomes rise, providing a comparatively less
     significant benefit for lower income individuals – which may explain its limited
     effect on homeownership rates. More affluent homebuyers get more purchasing
     power because the deduction means more to them, but lower-income homebuyers
     receive a marginally weak benefit.
   o The deduction increases demand for homes leading to higher prices and more
     units constructed.

Losses to the state of $4.9 billion in 2006-07

DEVELOPMENT AREAS (ENTERPRISE ZONES)                                    (Chapter
12.8 of the Government Code, and R&T §17053.33 17053.34, 17053.45, 17053.46,
17053.47, 17053.7, 17053.74, 17053.75, 17268, 17276.2, 23612.2, 23622.7, 23622.8,
23633, 23634, 23645, 23646)

State law provides special tax incentives for businesses located in enterprise zones
(including accelerated depreciation, 100% net operating loss carryover, wage credits, and
credits for sales tax on equipment purchased for use in the zone). The law allows the
governing body of a city or county to request the Department of Housing and Community
Development (HCD) to designate an area as an enterprise zone from applications
received from the governing bodies. Zones are designated for 15 years with the exception
of zones designated prior to 1990 that may have their designation period extended to 20

The state currently has four kinds of Geographically Targeted Economic Development
Areas: Enterprise Zones, Local Agency Military Base Recovery Areas (LAMBRAs),
Manufacturing Enhancement Areas (MEAs), and Targeted Tax Areas (TTAs). While
some differences exist among the tax incentives for each, taxpayers generally have access
to each form of preferable tax treatment. The law currently limits the number of
enterprise zones that may be designated to 42 and HCD is currently finalizing
designations for 23 zones designated conditionally in November, 2006, and recently
issued eight conditional zone designations to meet the statutory cap. State law allows
eight LAMBRAs, two MEAs, and one TTA, all of which are designated.

According to intent language, the Legislature intends enterprise zones to assist with the
economic growth in economically distressed areas that lack private investment, to have a
business-friendly economic development program, to attract and retain businesses, and to
provide job opportunities for all Californians. The statute attempts to define enterprise
zones using indicators of economic distress such as unemployment rates within a
designated area and provides eligibility criteria for tax credits for hiring employees that
face economic challenges or barriers to employment. For the program to be successful,
zones would need to show more business activity and lower unemployment among hard-
to-hire individuals.

Critics of the enterprise zone program assert that the program in practice does little to
nothing to help hard to employ individuals find jobs, instead, statutory eligibility criteria
are sufficiently vague for taxpayers to claim hiring credits for almost anyone. While
HCD has recently implemented hiring credit regulations, state law still allows hiring
credit eligibility if an employee lives in locally-designated moderately poor census tract
(so-called ―Targeted Employment Areas‖), which local agencies were only recently
required to update from decades-old census information (AB 1550, Arambula, 2006).

Employer associations and tax credit consultants argue that the program helps business in
California pay less tax, helping to ameliorate the high cost of doing business in the state.
These groups argue that the intent language in the statute stating the Legislature’s desire
for a ―business-friendly economic development program‖ justifies the deviation from
hiring individuals with economic challenges and barriers to employment despite
eligibility criteria enumerated in state law.

Losses to the state of $454 million for 2007-08.

Recent Legislation

SB 1008 (Ducheny) and AB 1766 (Dymally) allowed enterprise zones to apply for up to
two five-year extensions, revised criteria used to designate enterprise zones, refined
eligibility standards and required specified documentation for the hiring credit, added
specificity to the net interest deduction, prohibited enterprise zones from issuing vouchers
to taxpayers located in other enterprise zones, limited taxpayers’ ability to amend returns

to claim tax credits, and enhanced the Business Expense Deduction and Net Operating
Loss treatment for Geographically Targeted Economic Development Areas. Neither bill
was enacted.

RICE STRAW CREDIT                    (R&T Code §17052.10 and §23610)

California’s Rice Straw Credit allows taxpayers purchasing rice straw grown in
California a tax credit equal to $15 for each ton. Taxpayers may carry forward the credit
for ten years, but cannot claim a business expense deduction for the purchase of the rice
straw if they take a credit.

The Rice Straw Credit differs from most tax credits in two significant ways: (1) an
agency separate from FTB certifies and awards the tax credit, in this case the California
Department of Food and Agriculture (CDFA), and (2) the total amount of the credit is
capped at $400,000 per year and allocated on a first-come first-served basis.

Approximately $200,000 per year. The credit does not reach its capped level because
CDFA awarded less than the full $400,000 for tax years 2001, 2002 and 2003, however,
taxpayers have fully claimed the credit in the last two tax years. Because the credit is non
refundable, the cost falls short of $400,000 because certified taxpayers do not have
sufficient tax liability to offset the cost of the credit.

In 1991, the Legislature approved the Connelly-Areias-Chandler Rice Straw Burning
Reduction Act which gradually reduced the allowable amount of acreage of rice straw
that rice farmers could burn each year (AB 1378, Connelly, 1991). SB 318 (Thompson,
1997) subsequently revised the deadlines, which ended with a general prohibition against
rice straw burning, except in the case of disease when 25% or 125,000 acres can be
burned. The Legislature redirected the costs previously borne by the public in the form
of public health impacts resulting from rice burning to rice farmers who had to find new
ways to store, dispose, or sell approximately 1.1 million tons of rice straw left behind on
500,000 acres of land.

The Legislature enacted a $15 per ton tax credit to increase aggregate demand for rice
straw, thereby reducing the amount needed to be stored, burned, or plowed under, which
rice farmers argued was costly (SB 38, Lockyer, 1997). According to the Air Resources
Board (ARB) Rice Straw Diversion Plan (1998), rice farmers adjusted by plowing more
rice straw into the soil and attempting to find purchasers for rice straw. A fledgling
market for rice straw products slowly emerged with entrepreneurs and government
purchasing rice straw for animal feed, animal bedding, and erosion control, although only
a small fraction of rice straw is ever removed from farms, due to low price ($15 to $35
per ton), and high harvesting ($10 to $30 per ton) and transportation costs ($10 to $20 per
ton depending on distance traveled). The ARB also issued a report entitled
―Recommendations for Rice Straw Supply‖ (2001) which recommended extending the

purchasing credit and called for other tax incentives such as accelerated depreciation
incentives to other tax incentives to offset capital outlays for rice straw bailing and
harvesting equipment as well as similar incentives for storage. ARB has not written more
recent reports.

The credit was enacted to increase demand for rice straw, hopefully providing rice
farmers with sufficient income to offset bundling, storage, and transportation costs
incurred when state law prohibited burning rice straw. When the secondary markets
demand sufficient rice straw to cover those costs, the credit loses its incentive effect.
With demand for the credit increasing, and entrepreneurs introducing newer and better
ways of using rice straw, the Legislature may wish to consider whether the credit should
be allowed to sunset on its own terms.

Recent Legislation

AB 680 (Wolk) proposed to extend the Rice Straw Credit until 2012, and increase the
amount of tax credits awarded to $1 million. The bill is on the Senate Revenue &
Taxation Committee suspense file.

and §23610.5)

State law allows tax credits against the gross premiums tax, personal income tax, and
corporation tax for low-income housing constructed in California, known as the Low-
Income Housing Tax Credit (LIHTC). Credits are computed in modified conformity with
similar credits authorized by federal law and allocated by the California Tax Credit
Allocation Committee (CTCAC) according to specified criteria up to a cap set in statute,
which is currently approximately $71 million per year. CTCAC is comprised of the State
Treasurer, the State Controller and the Director of Finance. Three non-voting members
also sit on CTCAC.

State law bases credit amounts on when the housing was built and whether it was
federally subsidized or at risk of conversion. The taxpayer can also receive cash
distributions from the project operations. Projects constructed using these credits are
rent-restricted and must be occupied by a certain percentage of low-income occupants.

Low-income housing is a socially beneficial good: the economy demands workers for
jobs with wages that are insufficient to meet rents in higher-cost areas that demand those
jobs and California’s rents and housing prices are generally higher than most other states.
Low-income housing projects face many barriers in California: high costs of land, labor,
and capital; other investments that provide better returns; NIMBYism (Not In My Back
Yard); and state and local laws and policies protecting the environment to name a few.
Low-income housing tax credits provide an incentive for investors to fund these projects
instead of allocating their money elsewhere.

Because the credit is capped and allocated, CTCAC awards tax credits to projects on a
competitive process based on an evaluation of the most effective use of the tax credits.
Investors design projects in response to CTCAC’s specified criteria when seeking a tax
credit, then CTCAC decides whether the project proposals meet those standards and
allocates the credit accordingly. This program stands in stark contrast to other tax credits,
where a certain class of individuals or businesses may claim a credit based on
membership in a certain industry or business location and not on whether the credit
actually affects a change in behavior or results in a quantifiable public benefit.

$50 million for 2007-08 (est.)

Recent Legislation

SB 713 (Lowenthal) provides that a partner’s distributive share of the credit shall be
determined by the partnership agreement, allowing a partnership to allocate federal and
state low-income housing credits to different participants. Currently, housing sponsors
form partnership agreements with investors who provide capital to fund the housing
construction in exchange for the allocated tax credits. For example, a partnership
agreement may give tax credits to an investor to provide 99% of the necessary project
funding in exchange for possibly a much smaller ownership share in the project; the value
of the tax credits is sufficient to draw investment.

Federal partnership law, which the state conforms to, requires that the value of credits be
divided among the partners in accordance with each partner's economic interest in the
partnership. A partnership agreement must assign each partner a share of the
partnership's total tax credits in accordance with each one’s economic interest – federal
law precludes buying into the partnership and receiving all the tax credits just because the
partner has tax liability to offset. Generally, a tax credit is based on the ability of a
partner to depreciate the building.

This bill is on the Assembly Appropriations suspense file.



Enhanced Oil Recovery (EOR) projects employ highly technical procedures, sometimes
referred to as tertiary recovery methods, to increase the recovery of crude oil. Modeled
after a similar 15% EOR federal credit, the California credit equals 5% of qualified EOR
costs for projects located within California. Taxpayers who are retailers of oil or natural
gas or refiners of crude oil are not eligible to claim the California EOR credit.
Additionally, if the price per barrel of oil exceeds a certain level, the credit is zero. Due
to high oil prices, the credit for taxable years 2006 and 2007 is zero. However, the credit

has a 15 year carry over period meaning some taxpayers may still be claiming the credit
on a carryover basis.

While successful EOR projects ultimately increase the recovery of crude oil, in upwards
of 30 to 60 percent, the technologies and methods used in these projects are more
expensive than traditional primary and secondary recovery projects. The credit seeks to
offset the additional costs of EOR projects thereby increasing the amount of oil captured
from a domestic oil field and perhaps lowering the reliance on oil imports.

The credit has a built in limitation wherein if the price of crude oil is high, the credit
becomes zero. This feature protects against windfalls. A windfall occurs when a
behavior, such as an EOR, would take place even without the credit. With high oil
prices, even the expensive EOR projects probably would occur regardless of the credit.

With recent instabilities in some foreign oil producing areas, some would consider the
increase of domestic production of oil through EORs to be laudable. However, such
considerations take place at the national level, and are not necessarily a California issue.
Therefore, some may wonder what specific benefit California enjoys from providing this

Furthermore, the passage of recent legislation requires California to decrease carbon
emissions to 1990 levels, leading to an increased interest in clean, renewable energy
sources. Providing incentives for the production of crude oil in California, which emits
significant amounts of carbon, runs counter to this ―green‖ goal.

Lastly, sometimes states offer preferential tax treatment in order to encourage business
and economic activity within their state or, at the very least, to discourage a migration of
business out of state. Unlike a job or a factory however, an oil field cannot move, and
therefore it is unclear if this credit encourages any additional activity.

As the credit has been zero for taxable years 2006 and 2007, revenue impact is minimal.

Recent Legislation
SB 38 (Lockyer), Chapter 954, Statutes of 1996, established the California EOR credit.

HOUSEHOLD AND DEPENDANT CARE CREDIT                                            (R&T §

The Household and Dependant Care Credit is a tax credit for individuals who pay child
or dependant care for the purpose of allowing those individuals to be gainfully employed
or seek gainful employment.

This credit is based upon a percentage of an identical federal credit. The federal law
allows a maximum of $3,000 for one child or $6,000 for two or more children in
qualified child or dependent care expenses. Dependent upon income level, a maximum
of 35 percent of those expenses result. Thus, the largest federal credit available is $1,050
for one child and $2,100 for two or more children. California allows a credit based upon
a percentage of this federal credit. A taxpayer qualifies for the California credit equal to
50 percent, 43 percent, or 34 percent of their federal credit, depending upon income.
Thus, the largest California credit available is $525 for one child and $1,050 for two or
more children. The credit is also refundable thereby allowing individuals with no tax
liability to claim the credit.

This credit is different from the dependent credit which LAO suggests reducing. The
dependent credit is a nonrefundable personal income tax exemption for each dependent.
In 2007, this credit, which is subject to a phase-out for high-income taxpayers is $294.

Estimated revenue loss associated with the child and dependant care credit is $185
million for FY 2007-08, $186 million for FY 2008-09, and $188 million for FY 2009-10.

This credit is meant to lower the costs of child care for individuals who work or are
looking for work. Between both the federal and California credit, taxpayers can save
upwards of $1,575 for one child and $3,150 for two or more children in childcare costs.

The effectiveness of this tax credit is unknown as it is unclear whether it changes
behavior. It is possible that a credit for $3,150 for childcare allows a lower income
individual to find and maintain employment when otherwise the cost of care would prove
to be too cumbersome to allow that behavior. On the other hand, the extent to which an
individual would pay for childcare costs regardless of the credit results in that individual
receiving a windfall. However, as this credit is tiered based upon income levels
ultimately resulting in no credit for individuals with incomes over $100,000, there is a
protection against windfalls.

Lastly, this credit may encourage individuals to employ a licensed child care center to
watch their children rather than utilizing a network of family, friends, or other unlicensed
individuals to provide childcare. The degree to which this happens is also unknown.

Recent Legislation
AB 480 (Ducheny), Chapter 114, Statutes of 2000, enacted the Household and Dependant
Care Credit.

AB 847 (La Suer), introduced in 2001, would have increased the credit amount.

SB 1366 (Kuehl), introduced in 2002, would have made technical, non-substantive
changes to the statute.

AB 2963 (Aroner), Chapter 757, Statutes of 2002, provided that the custodial unmarried
parent who no longer lives together with the other parent qualify for the credit.

SB 1724 (Speir), Chapter 824, Statutes of 2002, conformed provisions of the credit to
federal law and lowered the states credit.

SB 600 (Committee on Judiciary), Chapter 282, Statutes of 2003, provided technical,
non-substantive changes to the statute.

AB 1740 (Committee on Revenue and Taxation), Chapter 13, Statutes of 2004, provided
clarifying language to the credit.

SB 1108 (Committee on Judiciary), Chapter 22, Statutes of 2005, made technical, non-
substantive changes to the statute.

AB 115 (Klehs), Chapter 691, Statutes of 2005, conformed provisions of the statute with
federal law.

SB 1852 (Committee on Judiciary), Chapter 538, Statutes of 2006, made technical, non-
substantive changes to the statute.

      Sales and Use Tax Exemption for Farm Equipment – R& T § 6356.5
      Sales and Use Tax Exemption for Diesel Fuel used in Farming and Food
       Processing –R& T § 6357.1

The sales and use tax exemption for farm equipment provides preferential tax treatment
for individuals who purchase that equipment for use in producing and harvesting
agricultural products.

The sales and use tax exemption for diesel fuel provides preferential tax treatment for
individuals engaged in farming activities including the activity of transporting and
delivering farm products to the marketplace.

A person engaged in an agricultural business, as described in Codes 0111 and 0291 of the
Standard Industrial Classification Manuel, who purchases farm equipment and machinery
is exempt from paying the state’s portion, 5 percent, of the sales and use tax. Local sales
and use taxes are not exempt and must still be paid.

Additionally there is an exemption from the state’s portion, 5 percent, of the sales and use
tax when purchasing diesel fuel for use in farming activities. Local sales and use taxes
are not exempt and must still be paid. Farming activities have the same definition set

forth Section 263A of the Internal Revenue Code for farming business. Farming
activities also include the transportation and delivery of farm products to the marketplace.

Estimated revenue loss associated with the sales and use tax exemption for farm
equipment is $112 million in the General Fund and $6 million in the State Fiscal
Recovery Fund for FY 2007-08, $114 million in the General Fund and $6 million in the
State Fiscal Recovery Fund for FY 2008-09, and $117 million in the General Fund and
$6 million in the State Fiscal Recovery Fund for FY 2009-10.

Estimated revenue loss association with the sales and use tax exemption for diesel fuel
used in farming activities is $41 million in the General Fund and $2 million in the State
Fiscal Recovery Fund for FY 2007-08, $42 million in the General Fund and $2 million in
the State Fiscal Recovery Fund for FY 2008-09, and $43 million in the General Fund and
$2 million in the State Fiscal Recovery Fund for FY 2009-10.

SB 671 (Alquist), Chapter 881, Statutes of 1993 provided a 6 percent tax credit of the
cost of manufacturing equipment to qualified taxpayers. Farmers were not included in
the definition of a qualified taxpayer. Since that time, and until AB 426, farmers sought
similar tax benefits granted under SB 671. On January 1, 2004, the 6 percent
manufacturers’ investment credit provided under SB 671 repealed itself under its own
provisions as it did not generate the number of new manufacturing jobs it set out to
produce. The farm equipment sales tax exemption modeled after SB 671 still remains in

At the time, the agricultural industry argued that California’s tax policy created a
competitive disadvantage for farmers as a majority of other states provided either no sales
tax or a partial sales tax exemption on agricultural equipment.

The effect the sales and use tax exemption on both farm equipment and diesel fuel used
in farming activities has on behavior is unknown. It is known that the efficacy of SB 671
manufacturers’ investment credits was not enough to sustain itself. As the sales tax
exemption on farm equipment was modeled after SB 671, one could argue that it too does
not result in a changed behavior. To the extent that farmers would purchase new farm
equipment or engage in farming activities regardless of the tax credit, a windfall exists.

Similarly, proponents of SB 671 argued that California risked losing manufacturing jobs
as firms would relocate without preferential tax treatment. This argument does not hold
for farmers as fertile farming land cannot move out of California.

Recent Legislation
AB 426 (Cardoza), Chapter 156, Statutes of 2001, enacted both the Farm Equipment and
Diesel Fuel used in Farming and Food Processing sales and use tax exemptions.

AB 923 (Firebaugh), Chapter 707, Statutes of 2004, in its previous form prior to being
chaptered, would have repealed both of these exemptions.

(R&T §17201, 17250, and 24349)

Typically, the value of an asset decreases over time. Generally, economic depreciation is
the actual decrease in the value of the asset over a year. Depreciation beyond economic
depreciation, often referred to as accelerated depreciation, is method of deducting the
value lost in an asset sooner than what might have been the actual decrease in a year.
Allowing taxpayers to deduct accelerated depreciation from their tax liability gives
preferential treatment to those who purchase and own physical assets used in a trade,
business, or to generate income.

California allows a depreciation deduction for the exhaustion, and wear and tear of
property used in a trade or business, or held for the production of income. California
allows depreciation beyond economic depreciation for businesses subject to the Personal
Income Tax Law, but not for businesses subject to the Corporate Franchise Tax Law.
Further, California law is in partial conformity with federal depreciation law.

Estimated revenue losses associated with depreciation beyond economic depreciation is
$570 million for FY 2007-08, $585 million for FY 2008-09, and $595 million for FY

It is generally agreed that a business should be able to deduct the value loss of an asset
from their income. Deprecation beyond economic deprecation, or accelerated
depreciation, allows businesses a faster write-off of these losses thereby allowing the
business to recover the cost of their asset sooner.

There are two main arguments in favor of accelerated depreciation. First, allowing a
faster recovery method for the cost of an asset encourages businesses to purchase
qualifying property or equipment because the return on the investment is higher. That is,
if an asset generates revenue and it is possible to quickly recover the cost of that asset,
then its rate of return increases. Second, accelerating the depreciation of an asset allows
a business to replace that asset prior to the end of its usefulness. For example, a
computer several years old may still operate, but is probably obsolete. Likewise, older
equipment may still work, but may require more energy. Businesses can more easily
replace that equipment, even though its still functions, if they can deduct its depreciation
beyond its economic depreciation, in turn generating more economic activity by
increasing business investments. The extent to which this is true is unknown. If a
business would invest in an asset regardless of an accelerated depreciation schedule, then
it is a windfall for the business and does not marginally increase any business investment
in the economy.

Some argue that accelerated depreciation may encourage the wrong type of behavior. By
allowing business to write-off the cost of an asset quicker it provides incentives to
businesses to think about short-term, tax-favorable decisions in lieu what the best long-
term investment strategy.

Recent Legislation
AB 35 (Klehs), Chapter 873, Statutes of 1993 established Revenue and Taxation Code
Section 17201.

AB 53 (Klehs), Chapter 1138, Statutes of 1987 amended Revenue and Taxation Code
Section 17250 consistent with Tax Reform Act of 1986 (Public Law 99-514). Generally
§17250 provides modifications and exemptions to California’s depreciation rules.

AB 115 (Klehs), Chapter 691, Statues of 2005, the most recent amendment to Revenue
and Taxation Code Section 24349, provided exemptions to conforming to federal
depreciation law.

ALLOWANCE DEDUCTION (R&T § 17681 and 24831)
Independent oil and gas producers, generally defined as those with small refining or retail
operations, may claim a percentage of gross income for resource depletion. These
taxpayers deduct a fixed percentage of gross income for depletion, rather than deducting
the cost of the asset, which is generally greater than what is allowed under the cost
depletion method.

The fixed percentage of gross income deduction allowed to independent oil and gas
producers is for resource depletion. The percentage depends on the resource, 22 percent
for regular domestic natural gas, 10 percent for natural gas from geopressurized brine, 15
percent for domestic crude oil, and 15 percent for geothermal deposits. The depletion
allowance cannot be more than 50 percent of the taxpayer’s related net income prior to
the depletion deduction, or more than 100 percent for oil and gas properties.

The estimated revenue loss associated with the percentage depletion of resource
allowance was $22 million through FY 2007-08 as estimated by the Franchise Tax Board.

The estimated revenue loss associated with the percentage depletion of resources
allowance is $4 million in FY 2007-08, $4 million in FY 2008-09, and $4 million in FY
2008-09 by the Department of Finance.


This credit’s purpose is to provide incentives for companies to explore for oil and natural
gas. This credit aims to mitigate the risk and increase domestic exploration; because no
guarantee exists that a company exploration for oil and natural gas will prove fruitful.

A windfall occurs when a behavior, such as exploring for oil and natural gas, would take
place regardless of the credit. Crude oil prices are at near record highs. Natural gas
prices, while somewhat volatile in the short-term, definitely are trending upward in the
long-run. Exploration for non-renewable, increasingly expensive resources like oil and
natural gas probably would occur without a tax incentive even with the risks associated
with it.

With recent instabilities in some foreign oil producing areas, some would consider the
increase of domestic production of oil and natural gas to be laudable. However, such
considerations take place at the national level, and are not necessarily a California issue.
Therefore, some may question the specific benefits California receives from this credit.

Furthermore, the passage of recent legislation requires California to decrease carbon
emission levels to 1990 levels, leading to an increased interest in clean renewable energy
sources. Providing incentives for the production of crude oil, and to a certain extent
natural gas, which emits significant amounts of carbon, runs counter to this ―green‖ goal.

Lastly, sometimes states offer preferential tax treatment in order to encourage business
and economic activity within their state or, at the very least, to discourage a migration of
business out of state. Unlike a job or a factory, an oil or natural gas field cannot move,
and therefore it is unclear if this credit encourages any additional activity.

Recent Legislation
AB 53 (Klehs), Chapter 1138, Statues of 1987 enacted Revenue and Taxation Code
Section 17681.

SB 572 (Garamendi), Chapter 1139, Statutes of 1987 enacted Revenue and Taxation
Code Section 24831.

AB 35 (Klehs), Chapter 873, Statues of 1993 slightly modified both § 17681 and 24831.

CREDIT (R&T § 17053.62 and 23662)
Small diesel fuel refiners, defined as those that refine fewer than 55,000 barrels of crude
oil a day in California, may claim a credit equal to 5 cents for each gallon of ultra low
sulfur diesel produced. The credit is capped at 25 percent of qualified capital costs
incurred for compliance with applicable Environmental Protection Agency (EPA) or
California Air Resources Board (CARB) regulations.

Small refiners qualify for a credit worth 5 cents per gallon of ultra low sulfur diesel
produced. The credit is limited to 25 percent of qualified capital costs. Small refiners, as
defined in statute, process fewer than 55,000 barrels of oil a day in California and fewer
than 137,000 barrels of oil a day nationwide. Qualified capital costs are items certified
by the CARB of complying with EPA or CARB regulations to lower sulfur particulates
from 500 parts per million to 15 parts per million.

The estimated revenue loss associated with the ultra-low-sulfur diesel fuel environmental
credit was $6 million in tax year 2006 as reported by the Legislative Analyst’s Office.

However, at present there are no qualifying refineries left in California. Therefore, going
forward the revenue loss associated with the credit is zero.

This credit aims to offset the cost of compliance for small oil refineries of both a federal
and state regulation reducing sulfur particulates to 15 parts per million. As oil refineries
must reduce the sulfur content of diesel, complying with the regulations would have
happened regardless of credit to stay in business, raising the argument that a windfall
exists within this tax credit.

The vast majority of oil refiners in the state purchased equipment necessary to comply
with the sulfur content limitations. However, small refineries cannot as easily absorb the
fixed costs of the equipment; leading to a substantial competitive disadvantage to a large
refinery with higher levels of capital can pay the costs of compliance. Accordingly,
California provided a subsidy for these small refineries to mitigate the costs of
compliance in the form of this tax credit.

Some question whether public expenditures should finance the cost of regulatory
compliance. As government deems it import to require less sulfur in diesel, consideration
must be given to compliance costs, and possible cases of disproportionate tax incidence.
However, even if small refineries are disproportionately affected, with gas prices at or
near record highs, refineries may not necessarily lack the ability to pay.

In the future, the credit will not likely be used because CARB identified only one small
refiner qualifying for the credit, which was recently sold. A provision within the statute
allows the state to recapture a portion of the credit if the refiner sells their facility.
Therefore, the state should recoup some of the credit it has paid out.

Recent Legislation
AB 115 (Klehs), Chapter 691, Statues of 2005 enacted Revenue and Taxation Code
Section 17053.62 and 23662.

FORMULA (R&T § 25128 and 38006)

Existing state law generally conforms with the Uniform Division of Income for Tax
Purposes Act – a loose, multi-state agreement establishing a uniform approach to
apportioning taxable income of multi-state and multi-national corporations among the
states. California, along with other UDITPA-conforming states, uses an apportionment
formula to determine a taxpayer’s share of business income attributable to California,
based on the average of three factors: double weighted sales, payroll and property – each
factor is the ratio of that activity within California to that activity company-wide (i.e.,
California sales divided by nation-wide or worldwide sales).
Prior to January 1, 1993 California applied a three factor formula in which payroll,
property and sales were equally weighted. After 1993, California adopted a formula in
which the sales factor is double weighted. The following industries are exempted from
double weighting the sales formula: agriculture, extractive and financial business
activities. About 97% of corporations utilize the double-weighted formula.

Annual losses to the state average $159 million

The purpose of the double weighted sales factor is to encourage businesses to locate
productive activities in California by reducing taxes for corporations whose payroll and
property factors are larger than their sales factors and increasing taxes for corporations
whose sales factors are larger than the other two. Double-weighting the sales factor
serves as an incentive for firms to produce goods and services in California and sell them
elsewhere. Higher taxes for businesses with larger sales in California could drive up
consumer prices in the state or decrease the availability of products in the state. Without
question, it creates winners and losers among corporations. Those with greater
investments in employment and property in this state benefit much more than those with
greater sales. The dynamic effects of investment and sales are both substantial and the
state would have to review all three to see which nets the greatest benefit overall.

This program could be considered successful if the benefits from induced increases in
investment and employment in California outweigh any additional costs to California
consumers and outpace the static cost of double weighting sales. It is not known how
much investment or employment currently located in California would have occurred in
the absence of this program.

Related Legislation
AB 1591 (Ma, 2007) and AB 198 (Assembly Budget): Allows an electing taxpayer to
include an additional sales factor in the apportionment formula for every $250 million of
qualified expenditures made on or after January 1, 2007. These bills are pending further
action in the Assembly.


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