Proposition 39 – Why You Should Vote Yes on the Most Boring Proposition on the 2012 Ballot

Proposition 39 would eliminate the ability of companies to choose between two methods to calculate their taxable income in California and require them to use sales only for the calculation.  Estimated revenue, per the California Legislative Analyst’s Office, would be more than $1 billion annually with $500 – $550 million being earmarked for clean energy and energy efficiency projects for five years.

The proposition would also increase education funding in the state due to higher total tax revenues and the corresponding increase in the amount of education spending required by Proposition 98.  The increase in school funding is estimated between $200 and $500 million for five years and from $500 million to over $1 billion from 2018-19 into the future.

Proposition 39 would require all companies to calculate their tax liability using their percentage of sales in California, rather than allowing companies to choose between a sales only calculation and a combination of the percentages of property, payroll, and sales in the state.  The calculation of state income tax liability uses these factors in a formula called apportionment and there are a variety of methods used in different states.

Currently companies may choose between two apportionment methods when calculating California income.  As is apparent, allowing for the choice between methods of calculation results in companies choosing that which creates the lowest tax bill.  No individual or company should be expected to voluntarily pay more taxes than they are required.

However, typically the formula for calculating taxes is not left to the discretion of the taxpayer nor should it be.  The goal of any tax system should be fair, consistent, and clear rules: Proposition 39 is a step in the right direction in a state that sorely needs a lighter tax touch and a less complex tax system.

Flexibility in calculating apportionment is not common in other states and primarily benefits out-of-state companies.  Companies located in California have limited ability to take advantage of reducing their liability unless they have significant payroll and property outside of the state.

The calculation of income tax in California should be straight-forward, simple, and consistently applied to all companies.  Proposition 39 would do that and increase tax receipts for the state at a time when they are greatly needed.

Opponents to Proposition 39 note that changing to a single sales factor calculation may increase the tax burden for some companies.  This is true, but it will also reduce the tax burden for other companies at the same time.  Those that will likely see a higher tax bill would primarily be companies with small percentages of payroll and/or property or high percentage of sales in the state.

Since California is the nation’s largest consumer market it appears this scenario would apply to many businesses, primarily those headquartered outside the state.  Requiring all companies to use one method for calculating their taxes removes ambiguity and applies the same rules to all companies across the board.

California is not the first state to place a greater weight on sales in calculating tax liability.  According to the Institute on Taxation and Economic Policy, seventeen states already use the single sales factor method for calculating apportionment (CO, GA, IL, IN, IA, LA, ME, MD, MA, MI, MS, MO, NE, NY, OR, PA, WI) and a majority of states use an apportionment calculation that “double-weights” the sales factor – giving sales a higher value than property and payroll in calculating tax liability.  Both the single sales and double-weighted sales methodologies place a higher emphasis on the sales factor than the traditional three-factor apportionment which gives equal weight to sales, payroll, and property.

There is a trend nationally toward placing more emphasis on the sales factor in calculating apportionment.  A single sales factor or more heavily weighted sales factor typically benefits companies based in the state because payroll and property do not increase the tax burden in the state, encouraging companies to expand their headcount and physical footprint.  This logic also removes the disincentive for out-of-state companies to add payroll or property in the state because there is no increase in liability resulting from such actions.

Amazon has famously avoided creating a physical presence in California to avoid paying taxes in the state.  Although sales tax is the liability most noted in regards to Amazon, this strategy also avoids corporate income tax liability for the internet giant and is just one example of many companies that sell to California’s large consumer base and avoid paying any taxes in the state whatsoever.  Proposition 39 would ensure that out-of-state companies do not have access to our millions of consumers while also avoiding any payment to the state.  For companies already located in California, like technology company Apple, the single sales factor calculation does not penalize them for adding buildings and employees in California and encourages them to export and sell outside of the state.

Increasing exports may result in a fall in income tax receipts from companies in California like Apple, but should be more than offset by the benefits to the state in the forms of higher employment, increases in property taxes from such companies, and increases in payroll and income taxes from employees in the state.

Another argument against moving to a single sales factor is that it increases the overall complexity of tax laws in the United States.  This is also true – changes and uncertainty surrounding tax codes are typically a complicating factor and the multitude of apportionment rules in the nation is complex.  It is also true that states are in competition for jobs and businesses.

Tax policy is a strong tool at the disposal of the states and Proposition 39 would help to encourage companies to expand or set up operations in the state by reducing a potential tax increase they currently would face by adding payroll in California.  There is a reason many other states have made similar changes – for economic reasons – and no reason why California should not take this opportunity to simplify their tax system, increase tax receipts, and promote energy efficiency all at the same time.  If complexity is added when looking at the states as a whole it is not the concern of California and we should focus on getting our house in order rather than trying to reduce discrepancies across state lines.

Arizona, Nevada, and Texas have aggressively sought to woo California businesses and employees to move their operations.  We need to keep our companies and jobs here by creating a better climate for investment and economic growth.  Again, Proposition 39 is a step in this direction.

The proper use of funds raised from Proposition 39 can be debated.  Energy efficiency and clean energy are growth areas and would encourage job creation in industries likely to be needed in the future.  The California Legislative Analyst’s Office estimates at least 40,000 jobs would be created by this proposition.

Current proposed legislation, AB 1500, also proposes requiring single sales factor apportionment and is supported by the Yes on 39 campaign.  AB 1500 would direct the increase in revenues to a scholarship fund rather than energy efficiency and clean technology projects and the General Fund.  With the possibility our legislators will not enact this change, California voters should do so.  This change is a win for California companies, for California workers, and for California citizens.  Regardless of how the money is spent, this change to the apportionment system is a good one.

Starting in 2012-13 an estimated $500 million would go towards clean energy and energy efficiency projects and the related jobs to complete those projects.  An indirect impact of Proposition 39 would be increased school funding, since Proposition 98 requires a minimum percentage of of the state budget must be directed to education.  Proposition 39 would increase receipts and thus increase the amount required to go to education.  For the first five years beginning in 2012-13 the increase to education funding is estimated at $225 million and $500 million for years thereafter.  The remainder of funds raised by Proposition 39 would go to the General Fund.

Voting Yes on Proposition 39 is a vote for increased education funding and increased funding for energy efficiency and clean energy, and jobs for Californians.  It is also a vote that will simplify our tax code and make our state more attractive to companies looking to expand, potentially leading to additional indirect job creation in our great state.

Eds. Note: URL’s listed below have been shortened to let them fit into our format

Proposition Text:

Funding For (Yes):

*Tom Steyer, founder and co-senior managing partner of Farallon Capital Management LLC and co-founder of the OneCalifornia Bank – $21.9 million
*Californians for Clean Energy Jobs is the secondary financial backer. – $1.1M
*League of Conservation Voters – $25,000


Funding Against (No):

*Coalition of businesses  California Employers Against Higher Taxes.  The coalition spokesman Peter DeMarco has said that the ballot measure will drive jobs out of California. The coalition includes: Chrysler,  General Motors,  Kimberly-Clark and  International Paper
*California Manufacturers and Technology Associations

Endorsements For (Yes):

Oakland Tribune   

San Jose Mercury News

Endorsements Against (No):

California Republican Party

Neutral/Not Decided Yet:

California Democratic Party
San Francisco Chronicle – No endorsement at time of writing
Los Angeles Times – No endorsement at time of writing
San Diego Union-Tribune – No endorsement at time of writing
California Labor Federation – No endorsement at time of writing




John P. Anderson

John was an accountant in a former life and now devotes his time to child-rearing, reading, writing, and working to ensure that San Diego is truly America's Finest City. Interested in environmental issues, John enjoys connecting with others that want to improve the health of our world and community. You can find John at or on Twitter (@j_p_a_). Comments, suggestions, wisdom, and complaints are enthusiastically welcomed.


    • avatarJohn Anderson says


      That is a great question and I’m not sure why. I have reached out to Chris Myers at the California Democratic Party for additional information and reasoning behind their position. Hopefully I’ll hear back and will post an update to this article.

  1. avatarJames Barba says


    I’m curious where the estimate of 40,000 new jobs comes from? I searched the LAO assessment of Prop 39 to no avail.

  2. avatarChristine says

    This is a HORRIBLE proposition!!! It will bring hydraulic fracking to CA in a big way. Just FOLLOW the MONEY! Its being pushed by hedgefund manager, Robert Rubin (the guy behind derivative deregulation) protege Tom Steyer who is a HUGE proponent of natural gas as “clean energy”. His hedgefund stands to make BILLIONS from this subsidy. In addition it sets up a multi million dollar bureacracy to dole out the billions w/ zero accountabilty that any of the projects actually help the environment.

  3. avatarChristine says

    This could be the most dangerous proposition on the ballot! Do your research Free Press!!!! BAD JOURNALISM!!!!! You are regurgitating the spin rather than using critical thinking to spell out what this actually means.

  4. avatarChristine says

    Steyer is also a HUGE investor in BP and other big Oil comps. The way this Prop is written the billion dollars a year could be given to BP for any project they want including fracking. Why would you trust Tom Steyer? He comes from Goldman Sachs…he has numerous hedgefunds set up in the Cayman Islands. You think he is doing this because he cares about the environment?

    • avatarJohn Anderson says


      Is your issue with Tom Steyer or with Proposition 39? I was writing on the merits of the proposition and it is clearly beneficial for California and Californians. If passed, funds would be raised for both the general fund and for energy efficiency projects and a loophole that allows companies to choose how to calculate their taxes would be closed. These are both good things.

      Proposition 39 is also endorsed by the Los Angeles Times, the Sierra Club of California, and the California League of Conservation Voters. (These endorsements were not included in the original article because they were not available at the time of publishing.)