California Voters Approve Tax Methodology Change to Benefit Energy Projects

by Manatt, Phelps & Phillips, LLP

[authors:  Jon Costantino and Fred L. Main]

On Tuesday, November 6, 2012, California voters approved Proposition 39-THE CALIFORNIA CLEAN ENERGY JOBS ACT.  Proposition 39 changes the way taxes are assessed for companies with multistate operations.  This change is projected to increase corporate taxes in California by over $1 billion annually.  Voters supported Proposition 39 with over 60% of their vote.

Under Proposition 39, multistate corporations are required to calculate their tax liability based on the percentage of their sales in California.  Of the $1 billion projected to be raised per year under Proposition 39, half of the money is to be directed to fund energy-efficiency and clean-energy projects, including those at public buildings and schools.  This redirection of increased revenues is to last through the 2017-2018 budget cycle.  After that, the entirety of the increased revenues go to the state's General Fund.

Proponents of Proposition 39 argued that a budget and tax deal approved in 2009 giving multistate corporations an election to choose either the "single sales factor" method or a "three factor formula" created a tax loophole unnecessarily benefitting corporations.  Legislative efforts to address this perception were unsuccessful.  As a result, opponents of the current tax structure qualified Proposition 39 for the ballot.

Funds resulting from Proposition 39 are to be available for appropriation starting with the 2013-2014 state budget; therefore, a potential spending plan could be unveiled with the Governor's proposed budget in January.  But as with any new program, the actual mechanisms to evaluate projects and distribute the funds will take considerably longer.

The new energy funding can be used for a variety of projects related to renewables, energy efficiency, job training and workforce development, and public/private partnerships.  While this range of projects is rather broad, the measure contains some general limitations on the use of the funds, such as requiring that funded efforts be cost-effective.  It is unclear how these limitations will be interpreted and, indeed, what projects would be prioritized for funding.  Much of the who, what, when and how for implementing Proposition 39 still needs to be worked out.  Guidance on these and other questions is expected to come from both the California Energy Commission and the California Public Utilities Commission as each is given a role in implementing the proposition.

In adopting Proposition 39, California voters have again spoken in favor of the state's being a renewable energy and climate change trailblazer.  In 2010, Proposition 23 was put on the ballot to cripple California's first-in-the-nation market capping carbon emissions and creating a market for trading emissions credits.  Despite the deep recession the state was in and appeals that passage of Proposition 23 would lead to job creation, California's voters rejected Proposition 23 overwhelmingly in the 2010 election.

The professionals at Manatt are fully engaged in this issue and the many other issues surrounding California's tax code and efforts to reduce GHG emissions.  For additional information, contact Fred Main or Jon Costantino with Manatt's Government & Regulatory practice in Sacramento at 916-552-2300.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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