Legislative Proposals

The states contend that they have a constitutional right to use the unitary method.  They note the United States Supreme Court decisions upholding the tax.  They feel that by agreeing to drop the unitary tax, they would be giving up a major source of revenue and surrendering a constitutional right.  Governor George Deukmejian noted that California has used the unitary tax for years and still attracts businesses.

However, due to increased pressure many changes in the laws relating to unitary taxation have been proposed.  None so far have had any success.  The effort to change the law is being pursued at both the State and Federal level. 

The Federal government has been studying the issue through a panel known as the Worldwide Unitary Taxation Working Group headed by Treasury Secretary Donald Regan.  The panel includes governors, officials from unitary states, high level corporate executives, state legislators and state tax administrators.  Recommendations were made on ways to resolve the dispute.  The compromise reached encourages states from taxing a portion of worldwide corporate profits in exchange for assistance from the Federal government in assuring compliance with the proposal.  It would include requiring greater disclosure of corporate finances to the states and increasing the audit activities of the Internal Revenue Service.  Over the next three years, at least 150 Internal Revenue Service agents will be needed to audit international transactions.  The Multi-State Tax Commission advocates increasing the number to 1,050.  Regan hopes that Federal legislation will not be necessary.  If the states repeal their unitary tax, the United States could appease their international trading partners.

At the state level, California senators Alquist and Johnson introduced Senate Bill 1437 on January 23, 194.  The bill proposed to allow foreign corporations to elect to exclude their foreign operations from the unitary apportionment formula.  This is known as the "water's edge" method.  Thus, only domestic sales, payroll and property would be taken into account.

The fiscal effect of this proposal would be a major general fund revenue loss due to reduced tax receipts.  According to the Franchise Tax Board, the annual loss would be in the range of 0 million dollars per year.  These estimates are based on tax information for 3,000 multinational corporations who control 33,000 foreign corporations.  Additional costs would be incurred for additional Franchise Tax Board audit staff.  The potential cost, though partially reduced by any Federal audit assistance, could exceed several million dollars.

The bill also proposed to increase the Bank and Corporation tax rate from 9.6% to 10% for corporations having taxable income in excess of one million dollars.

 This would result in a gain of general fund revenues lost from lower taxes being paid by foreign-based companies.  The bill was opposed by domestic companies who believe this bill would give foreign companies an unfair competitive advantage.  Following Deukmejian's recommendation, the bill would exclude non-United States income from taxation of foreign-based multi-national corporations, but include non-United States income in computing the tax for United States-based companies.  The bill died in committee.

Other bills introduced during the 1984 session included AB 2415 sponsored by Assemblywoman Teresa Hughes.  It would exclude foreign-based corporations from worldwide reporting if 50% or less of the company was owned by a United States corporation.  SB 1937 sponsored by Jim Neilson would allow companies to elect the waters-edge method.  This would apply to corporations owned and controlled by foreign corporations and based outside the United States.  Neither bill has shown any chance of becoming law.

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