California Proposition 39 did not get much attention in the months leading up to Tuesday’s election, but voters handily approved the measure to increase taxes on some corporations by about $1 billion annually and spend $2.5 billion of that money to conserve electricity and natural gas consumed by schools and other government buildings.

The appeal to Californians was understandable. Basically, the additional taxes will be paid by companies that sell a lot of their products or services in the state, but have relatively few employees and little property here. In turn, $500 million annually for five years will pay for public building retrofit projects, each of which must save taxpayers more on energy costs in the long term than the retrofits cost.

The money can be used for renewable energy installations, like solar panels, too, but the cost-effectiveness requirement currently favors energy efficiency projects like insulation or modernizing heating, air-conditioning, water or lighting systems, according to James Sweeney, professor of management science and engineering, and director of the Precourt Energy Efficiency Center at Stanford University.

“Many efficiency improvements can be made that can pay for themselves in several years. The economics of most renewable energy technologies don’t have that payback profile, though I am sure many of them eventually will get there,” said Sweeney.

According to a McKinsey & Co. report in 2009, state and local government buildings in the United States could reduce energy costs by $49 billion for $26 billion in efficiency investments, while also slashing their greenhouse gas emissions by a third. For decades California has been more aggressive than most states in promoting energy efficiency. State regulations result currently in utilities spending about $1 billion annually on financial incentives primarily for homeowners and businesses, rather than large government buildings. Such programs are funded primarily by utility customers, not tax receipts.

Under Prop. 39, the $500-$550 million a year will be divided into three areas: outright grants to cover the costs of the projects, low-interest loans for such projects and workforce training to increase the skilled workers available to install the new technologies.

The state legislature is to write the rules by June that will determine how the money will be divided among these three groups.

That will require a tense debate, said Sweeney. Cities and school districts in these tough budget times would much prefer grants than loans. Even 1 percent interest loans create more debt on already strained government balance sheets.

Federal stimulus funds that California allocated to energy conservation grants for small cities and counties in California were taken up quickly, while a related low-interest loan program is still taking applications.

“For public buildings, capital constraints have prevented cost-effective investments to conserve electricity and natural gas. Grants under Prop. 39 will clearly overcome these capital constraints,” said Sweeney.

On the other hand, most policymakers in Sacramento have a strong preference for low-interest loans, which upon repayment can fund additional projects. A significant loan program could leverage the Prop. 39 program far beyond five years and $2.5 billion, conserving more energy and creating more jobs than one-time grants. Such a program might also be extended to private companies rather than just governments.

Job Engine

Not only will the spending create jobs in California, but so paradoxically will the higher income tax on businesses, according to proponents of the measure.

“We would be better off collecting a billion dollars and burning it in a bonfire every year rather than the current tax law, which not only loses $1 billion but drives jobs out of state,” said Stanford Law School professor Joseph Bankman, a specialist on tax reform.

According to one independent estimate, the move to sales-based apportioning could result in tens of thousands of more jobs in California.

“That’s what makes this such a rare proposition,” explained Bankman, who publicly supported its passage. “Usually a tax break for corporations creates jobs, but this one worked for corporations only to the extent they did not have California employees.”

The current rule allows national companies operating in multiple states to determine what percentage of their profits are liable to California tax based on a formula comprising sales, employees and property in the state. Prop. 39 eliminates that option. The proportion of profits liable to California tax for multi-state companies will be based solely on what proportion of their sales are made here.

The change will cost companies like major automobile makers, which sell many cars in the state but have no manufacturing plants here. General Motors, in fact, began financing a $45,000 “No on 39” campaign with Kimberly-Clark Corp. and International Paper. The companies quickly dropped the issue, leaving virtually no funded opposition. The main “Yes on 39” organization had $26 million in contributions, primarily from Stanford trustee Tom Steyer. Steyer, a Democrat, was joined in his efforts by George Shultz, a Republican who leads the Shultz-Stephenson Task Force on Energy Policy at Stanford. Shultz held several key cabinet positions in the Nixon and Reagan administrations.

California’s decades-old system for multi-state corporations to apportion their profits was the norm across the country, according to Bankman. Basing the tax only on sales has over the past few years become the new standard. California made a mistake two years ago, Bankman said, when it introduced the sales-based rule but allowed corporations to choose which rule to use.

Under state mandates, the other half of the proceeds from the higher taxes must go to certain types of spending, primarily education. After five years, the $500 million for energy efficiency will become available for general spending.

By Mark Golden, Precourt Energy Efficiency Center. A shorter version of this article appeared in the Stanford Report.