The amount of money a business owes California in corporate income taxes each year is based on the business’ taxable income. Beginning in 2013, Proposition 39, if approved, would change existing law to require multistate businesses to calculate their California income tax liability based solely on the percentage of their sales in California, what is called a single sales factor approach.

That is the method used in many states, including Colorado, Illinois, Michigan, New York, Oregon and Texas. Businesses based only in California would be unaffected by this measure.

Current law allows multistate corporations to choose an option that effectively reduces their California tax burden compared to companies that operate only in California. The “three-factor method” allows a multistate company such as General Motors to use location of sales, property and employees (three factors) to calculate tax due the state. With this method, the more sales, property or employees the multistate business has in California, the more of their income is subject to state tax. Conversely, fewer employees and less property in California reduce its California tax burden.

For instance, if one quarter of the multistate company’s total sales were in California, the tax would be based on a quarter of the company’s total sales in all jurisdictions within which it operates.

The state’s nonpartisan Legislative Analyst’s Office calculates passage of Proposition 39 would increase taxes owed for most non-California companies by about $1 billion annually through 2018 and more than $1 billion beyond.

According to the measure’s text, increased revenues would be used to lower tuition costs at state universities and help fund alternative energy projects. The “Clean Energy Job Creation Fund” would transfer Proposition 39-generated revenue of about $550 million in each of five fiscal years beginning in 2013 for “funding projects that create jobs in California improving energy efficiency and expanding clean energy generation.” This money is earmarked for the purpose stated for the period stated.

The LAO forecasts school funding would rise if voters pass Proposition 39. General fund revenue raised by the measure would be considered in calculating the state’s annual Proposition 98 (school funding) guarantee. The LAO estimates the education revenue guarantee would grow by $200 million annually from fiscal 2012 through 2018. For 2018 and beyond, the LAO projects even greater funding.

Opponents, including the Republican Party of California, argue that forcing multistate corporations to pay more California tax will result in those companies building fewer facilities and hiring less employees in California, thereby potentially decreasing hiring and jobs for Californians and lowering other tax revenue sources.

When Proposition 39’s progenitor, Assembly Bill 1500 was working its way through the California Legislature, Brian Nestande, Idyllwild’s assemblyman, resigned his leadership post in the assembly over his caucus’s opposition to AB 1500. As the lone Republican to vote for the legislation, Nestande said at the time that he supported the bill because it would level the business playing field in California. “Passage would close a loophole,” he said. Nestande said his caucus was being inflexible and captive of an unrealistic no-tax mantra.

“I cast a vote yesterday [Aug. 13] as the only Republican to level the playing field for California businesses, so we have the same corporate tax policy as Texas, Wisconsin, South Carolina, Mississippi, Michigan, Indiana, Utah, and 10 other states,” Nestande said to his constituents in an email message. “I specifically named those states because they have Republican governors that are considered leaders in our party today. They gave their home-based corporations an advantage and so should we.”

Dorothy Rothrock, spokesperson for the California Manufacturers and Technology Association that opposes the bill, said Proposition 39 proponents are being disingenuous in crying foul about a supposed 2009 “back room deal.” She notes that what was added in 2009 by agreement of Democrats and Republicans was the single factor option to the already existing and long-standing three-factor option. By eliminating the three-factor choice, Rothrock said proponents of this initiative are pushing a major tax increase that would chill multistate companies’ interest in locating facilities and employees in California.

Major supporting contributors include Thomas Steyer, Farallon Capital Management LLC and Californians for Clean Energy and Jobs; League of Conservation Voters Inc. and Western States Council of Sheet Metal Workers PAC.

No major contributing opponents are currently listed. Both the League of Women Voters and the California Democratic Party are neutral on the measure. The LWV believes all money should go to the general fund for all programs funded by state revenue rather than earmarked for special programs.