Tax Breaks Like Apple’s Live On as Proposed California Ban Fails

Friday, August 30, 2019

California lawmakers rejected a bill to ban incentive deals like the one that has paid Apple Inc. $70 million in local sales taxes collected by its hometown of Cupertino, Calif. over the past two decades.

S.B. 531 by Sen. Steve Glazer (D) failed with a 35-21 vote on the Assembly floor Aug. 30. It needed a majority of 41 votes to pass and head to the desk of Gov. Gavin Newsom (D).

The bill targets a practice among some cities to redirect a portion of local sales taxes they collect from consumers on e-commerce purchases to major companies that have distribution centers or headquarters in their boundaries. Cities would be allowed to keep existing deals in place, but would be barred from entering into new ones.

Assembly members granted reconsideration to the bill, meaning it could come up for a vote again before lawmakers adjourn for the year on Sept. 13.

The vote was split along geographic lines, rather than the typical party lines. Republicans and Democrats who represent Fresno and other cities that embrace such deals joined together to oppose it. Twenty Democrats and two Republicans didn’t cast votes.

“Don’t take away a fundamental, historic tool that we have been able to utilize in making sure that those in our area who want good jobs have the opportunity to get them,” said Assemblyman Jim Patterson, a Republican who represents Fresno.

Fighting the Status Quo

Glazer said he believes lawmakers will ultimately ban the deals as they learn more about how destructive they are.

“Any time you try to change a policy that benefits the few at the expense of the many, those who benefit from the status quo will fight harder to defend it than the people who may not even know how they are being hurt,” he said.

The cities of Fresno and Perris, and the California Retailers Association oppose the bill.

A Bloomberg Tax investigation found that a number of cities in California have struck deals lasting decades to give companies half the 1 percentage point share of the 7.25% statewide sales tax rate they collected on their e-commerce sales in the state. About 10% of the state’s 482 cities are using the deals as a tool to attract or retain headquarters or distribution centers.

Major beneficiaries other than Apple include Best Buy, which has received or is owed $9.5 million from Dinuba, a small city in the economically struggling Central Valley, and Staples Inc., which has a similar deal with the city of Ontario.

Goes Too Far

Assemblyman Jose Medina, who has a bill to allow the deals to continue but impose new disclosure requirements, opposed Glazer’s bill on the Assembly floor.

“This bill goes too far,” Medina said. “What we need is more transparency.”

Medina’s A.B. 485 needs final votes on the Senate and Assembly floors to reach Newsom. It would require local governments to conduct public hearings before approving the agreements. Cities and retailers would have to provide more detailed information about expected tax revenue, jobs, and other state and federal subsidies the companies are getting.

Former Gov. Jerry Brown (D) vetoed a similar bill from Medina in 2018, saying he favored transparency with economic incentives but the measure would be too burdensome.

Newsom hasn’t taken a position on either bill.

Assemblyman Bill Quirk (D), who presented the bill on the Assembly floor on behalf of Glazer, argued that the California League of Cities is asking for the bill to end the “race to the bottom” between cities competing for jobs.

“These jobs would be in the general vicinity of these cities regardless,” Quirk said. “But what we have is cities competing with one another to give more money to the corporation.”

Republican Assemblyman Jay Obernolte said he supports the bill despite representing cities that use the agreements because the broader tax policy harmfully shifts revenue.

“It’s not fair that when a constituent of mine in Needles orders something online instead of going to a store that the sales tax revenue from that sale goes to a city other than Needles,” Obernolte said.

Obernolte has introduced an amendment to the state Constitution to assign the sales tax revenue to the location of the customer, rather than to the point of sale. The measure, A.C.A. 13, hasn’t progressed.