NCPA - National Center for Policy Analysis

California to Impose Tax on Out-of-State Business to Fund College Scholarships

May 15, 2012

A new proposal by California State Assembly Speaker John Perez (AB 1500), which he calls the California Middle Class Scholarship Act, would impose a tax on out-of-state businesses in order to fund scholarships for middle class students to attend state universities.  Perez argues that the move is justified because it is simply closing a loophole exploited by those businesses to pay less in taxes, says George Runner, a representative on the California Board of Equalization.

But here's the rub: the loophole he refers to is actually the result of bipartisan action in 2009 to attempt to draw more businesses to hire from California labor pools.  That is to say, this is no loophole at all, but rather a highly publicized, much sought-after legislative goal.

Nevertheless, Perez persists.

  • AB 1500 would impose a $1 billion tax hike on those businesses that are not headquartered in California.
  • It would use the collected revenue to provide college financial aid for families earning between $80,000 and $150,000 a year.

The speaker's objective, to improve higher education in the state by making available more funds to the beleaguered institutions, is admirable, but the revenue-raising method prescribed is ill-informed and harmful, says Runner.

  • Out-of-state corporations employ millions of Californians in various sectors.
  • To increase their tax burden is to offer them another reason not to operate in the state (on top of the state's already high level of taxes and burdensome regulatory climate), thereby threatening the jobs of those local workers they employ.
  • This could have the net effect of worsening employment, thereby raising revenues on corporate taxes while losing them in personal income taxes.

The speaker's plan attempts to solve a problem created by unwise state budgeting.  When Californians lack jobs, revenue falls.  When revenue falls, college fees go up and politicians cut higher education funds.  Imposing new taxes on struggling job creators would only make this cycle worse, increasing college fees further.

Source: George Runner, "Tax Hike for California College Scholarships: It's a False Hope," Los Angeles Times, May 4, 2012.

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