California Governor Jerry Brown released a proposed budget on January 10, 2011, the constitutional deadline required for the governor to present a budget to the Legislature. Faced with a $25 billion deficit, the Governor stated a desire to “restore California to fiscal solvency.” The budget includes several significant changes, including instituting mandatory single sales factor apportionment, repealing the costs-of-performance (COP) sales factor sourcing methodology, repealing the Enterprise Zone Program, and establishing a tax shelter amnesty program and a financial institution record match program. A brief overview of the governor’s proposal suggests restoring fiscal solvency will result in businesses, state employees and recipients of state-funded services bearing the budgetary pain wrought by years of fiscal neglect.

Mandatory Single Sales Factor

In early 2009, Governor Schwarzenegger signed legislation providing most corporate taxpayers with the right to elect a single sales factor apportionment formula rather than using a four-factor formula (which includes a property factor, payroll factor and double-weighted sales factor). The legislation was part of the 2009 state budget and took effect on January 1 of this year.

Governor Brown’s budget proposal would require taxpayers to use a single sales factor formula. The governor’s budget summary inaccurately describes the single sales factor election as a means for corporations “to choose the lower of two tax rates” and comments that, although single sales factor apportionment may allow California to remain competitive with other states, “there is no reason – from an economic development perspective – to allow businesses to choose how their income will be apportioned.” With potential revenue gains of $68 million in 2010-11 and $942 million in 2011-12, the proposal likely will be attractive to state legislators who are faced with large reductions in social services and state employee compensation.