1. Proposition 39
Chapter 7 covers how countries limit capital outflows. Now, you can apply this to the State. Virtually all investor states, including the state of California, have exercised some control over outward FDI from time to time. One policy has been to limit capital outflows out of concern for the state’s ‘balance of payments.’ In addition, the state of California has occasionally manipulated tax rules to try to encourage their firms to invest in the state. The objective behind such policies is to create jobs at home rather than in other states. With this in mind, answer following three questions pertaining to Proposition 39.
a. The Prop 39 requires out-of-state businesses to calculate their California income tax liability based on the percentage of their sales in California. However, it is not intuitive how ‘calculating their California income tax liability based on the percentage of their sales in California’ actually helps California financially. Explain how it helps the state of California, according to supporters of the Prop 39.
b. How does Prop 39 calculate income tax liability for in-state businesses then? Is that the same as out of state businesses?
c. If approved, the Prop 39 will dedicate $550 million annually for five years from the initiative’s anticipated increase in revenue in order to fund projects that “create energy efficiency and clean energy jobs” in California. If indeed it is approved, should we allocate money to projects that create energy efficiency and clean tech? Or, should we invest elsewhere? Support your answer.
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