Thursday, October 11, 2012

What is a Tax Loophole Really?

Tax loopholes are available in the United States for both businesses and individuals. While individuals can benefit greatly from certain loopholes in reducing their tax burdens, businesses stand to profit the most from them. Proposition 39, a proposed change to the California tax code set for inclusion on the November 6, 2012 general election ballot, is looking to close a loophole that many out-of-state businesses benefit from.

What is a Tax Loophole?

A loophole is an exception to a rule. Any given loophole is usually in direct disagreement with the rule. In the case of a tax loophole, the exceptions are definitely unintended. When taxes go into legislation to increase revenue they are usually for specific things. A great example is the particular loophole that Proposition 39 seeks to close.

The loophole in question allows out-of-state businesses to enjoy doing business in California without dealing with the same tax burden that in-state businesses have to. That creates an unfair playing field that penalizes California businesses for doing business in their home state. Currently, out-of-state businesses can actively reduce their tax burden by choosing to keep all facilities and employees outside California.

That epitomizes the unintentional nature of a tax loophole. Tax legislators always create new regulations to increase revenues. That is the nature of taxation. However, they never intend to penalize those who live and do business in their own state. Measures like Proposition 39 intend to correct those unintentional mistakes, recoup lost revenue and give the potential advantage back to in-state companies.

What will Proposition 39 Do?

If California residents choose to vote yes on Proposition 39 during the November 6, 2012 general election, they will create a more favorable environment for California businesses. Should the proposition pass, out-of-state businesses will have to start calculating their tax liabilities in California-based on their sales in the state. Additionally, it will remove the option out-of-state businesses have to choose an alternate taxation formula that gives them an advantage over California-based businesses.

Finally, Proposition 39 is set to allocate $550 million per year over five years, a total of $2,750 million, toward funding various projects. Those projects would create energy-efficient jobs for Californians and increase overall energy efficiency.

From the perspective of California-based businesses and individuals working in California, Proposition 39 is good news. It stands to even the playing field, create jobs and increase environmentally favorable conditions for everyone. Of course, the corporations operating from outside California do not relish that particular tax loophole closing.

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