Silicon Valley Leadership Group

Tax Policy News

California Tax Policies and Business Expansion
"tough choices - real solutions"

This document seeks to educate policy leaders about the realities and solutions available to help California and Silicon Valley employers remain competitive, expand, and create jobs.

A state’s ability to attract business, retain commerce, and continue innovation and economic growth depends on the soundness, stability and quality of a locality’s tax policy. Frequently, California’s tax system seems disorganized, because it is. Our state’s tax policy is a patchwork of political compromises largely borne out of the negative legacies and unintended consequences of previous policies which threaten our ability to create more Research & Development, more production, and added jobs.

In California, Prop. 13 has provided a degree of certainty to property owners as to the levels of their property taxes. Yet, Prop. 98 established a minimum funding guarantee to local schools, which are distributed from the Prop. 13 pool. Despite certain protections to taxpayers afforded under both propositions, with every rule, there seems to be an exception. In recent years, the exception to such protections has been clear. Whenever a state budget shortfall occurs, infrastructure funds are raided by the state. If the state exercises its authority to take funding back from schools, cities and counties to cover deficits, taxpayers only suffer, sending the state more deeply into infrastructure and fiscal jeopardy. Rather than creating a flexible tax system that provides a steady stream of reliable funding for state and local government services, the state seems to patiently await a successful private-sector boom and the resulting tax receipts.

Unfortunately, the state legislature has responded to this series of events by rejecting most policy proposals that aim to encourage hi-tech and bio-tech job stimulus with the rationale that “any economic stimulus proposal is too costly due to the state’s budget shortfall.”

Unintended Consequences

Long-term investments are not made by the state in areas such as enhancing R&D incentives, eliminating the double taxation on equipment purchases, and the playing field isn’t level with how tax formulas calculate businesses tax liability.
Layers upon layers of parochial tax policy have resulted, leaving the business taxpayer with an unavoidable decision with where to locate their operations—growth is more frequently occurring in other states and countries.
State, County, and City governments rely on the ballot process for revenue generating measures (e.g. property tax levies, parcel taxes, benefit assessments, and sales tax measures) to fund infrastructure projects.
Voters distrust government at all levels and their ability to manage taxpayer provided revenue unless they are able to oversee and have accountability for their investment.
Legislators doubt that business taxpayers will actually grow their facilities and jobs in California if incentives are approved, and some also believe businesses will expand in any event.

Tax Rate by State

California Compared

California and Silicon Valley especially are fortunate to have highly skilled workers, beautiful surroundings, superior higher education institutions, and close proximity to supply chains. However, continuing convoluted tax policies will produce more headlines from other states and countries boasting of the opening of new facilities and added jobs. For example:

Arizona’s calculation of state income taxes for an Intel fabrication plant which includes 1,000 new jobs. Arizona’s recent adoption of an 80 percent sales factor formula
AMD receiving $1 billion in incentives to open a chip factory in New York
And, Michigan’s deal-specific tax incentive of $38 million over 20 years to Google

Due to the realities of global competition, employers are faced with the tough decision of operating in costly California or a state or country where tax policies provide lower costs of operation.

Similar to other sections in this report, several key tax policy indicators can be comparatively measured with respect to California’s high-tech rivals in corporate property, sales and use, and income taxes. In this report, California’s property and sales tax rates and policies are compared with our competitors including the trends and realities of doing business in California through a tax policy lens. California’s taxes rank among the highest in three of four categories (sales tax, corporate income tax, and personal income tax).

With respect to property taxes, California continues to have rates ranking among the highest. The property tax rates in California fluctuate from county to county and even at times from city to city and school district to school district, depending on parcel tax measures and special district levies. Generally, Silicon Valley’s property tax rate is higher than the state average of 1.08%, with 1.25% for Santa Clara County, 1.20% for San Mateo County, and 1.31% for Alameda County.

Country	Corporate Tax Rate
India	42%
Japan	41%
Germany	40%
France	35%
United States	35%
China	33%
United Kingdom	30%
Sweeden	28%
Czech Republic	24%
Russia	24%
Singapore	20%
Switzerland	16%
Ireland	13%
Puerto Rico	7%

Compare this with San Diego’s high-tech area where the property tax rate is only 1.11% - closer to the state average. Also, it’s worth noting that while overall property tax rates in California seem modest, California has much higher property values than most other competitive areas. In fact, a 2003 report from the US Census Bureau showed California as the state with the second highest property values in the nation, behind only Hawaii, a place where land is genuinely scarce.

Regarding sales and use taxes, it must be noted that CA’s lack of an exemption for productive business assets, which is prevalent in virtually every other state, makes California’s sales tax burden comparatively higher.

A state or region’s tax rates may seem byzantine, but tax rates can provide companies’ insight into the costs of doing business in, and the potential competitive advantages of relocating to, certain regions. Especially when considering “greenfield” or new developments, the tax rates and especially the tax incentives that local economies provide can make or break site location decisions.

To remain competitive, California, and municipalities in Silicon Valley, must embrace pro-growth tax policies and attempt to avoid the unintended consequences of the past. This chart illustrates where California stacks up relative to our competition throughout the country in terms of tax policies to promote new business and spur expansion.

From an international perspective, corporate rates vary greatly, but the U.S. ties France for the fourth highest corporate tax rate out of the nations compared below. Although the countries of France, Germany, India are equal to or higher than the U.S., these countries have been successful in wooing U.S. manufacturing operations due to offsetting tax incentives and business friendly environments in those countries.