Manufacturing Tax Break Set to Expire Next Year
By SHERRI CRUZ
A tax credit for California manufacturers is on the chopping block.
The 6% tax credit on factory investments, known as the Manufacturers Investment Tax Credit, expires at the end of the year unless revived during Gov. Arnold Schwarzenegger’s special legislative session this month.
The tax credit has a couple of things going against it: few manufacturers have used it in recent years, and higher-profile issues such as workers’ compensation insurance reform have overshadowed efforts to extend the credit.
“It’s a tough sell this year,” said Jack Stewart, president of the California Manufacturers & Technology Association based in Sacramento.
Schwarzenegger’s administration has been non-committal but understanding, said Stewart, who added he’s hopeful.
“We think it’s the kind of thing Gov. Schwarzenegger is going to be positive about,” he said.
The tax credit is set to expire just when manufacturers are likely to use it. They haven’t made much use of it in the past two years because they haven’t invested in plants during the downturn. But with demand picking up, plant operators are likely to make upgrades they earlier put off.
The association is taking a two-pronged approach to reviving the credit: lobbying the new administration to include the tax credit in Schwarzenegger’s proposed January budget and supporting five bills by Republicans and Democrats that include a credit extension.
The tax credit was first offered in 1994. It gives manufacturers a break on spending on machinery and other equipment used to make products. Some spending on computer products used to develop software also qualifies.
The credit excludes spending on furniture and shelving to store products.
Then-Gov. Pete Wilson pushed the tax credit as a way to encourage job growth after the state had lost some 260,000 manufacturing jobs during the early-1990s recession. As written, the credit ends if total state employment is 100,000 less than the year before,where California now is.
The California Budget Project, a Sacramento-based nonprofit that does fiscal and economic analysis, is a big opponent of the tax credit.
An April report by the group found that 9.1% of the state’s manufacturers claimed the credit in 2000,most were large companies that the California Budget Project says don’t necessarily need the credit.
In 2000, 326 companies, each with annual sales of more than $1 billion, accounted for nearly 62% of the total $458 million in credits claimed that year, according to the California Budget Project.
The report also argued that the tax credit hasn’t boosted jobs and shouldn’t be extended. Average yearly manufacturing employment in the state has declined by 54,000 jobs since the creation of the credit in 1994, according to the report.
The California Manufacturers & Technology Association nevertheless would like to craft new legislation that doesn’t tie the credit to jobs.
But when the tax credit originally was set up, linking it to job growth was the compromise made to move the bill forward.
Chris Thornberg, an economist with the University of California, Los Angeles Anderson Forecast, said that incentives offered only to one sector raise the question: “Should we value manufacturing jobs more (than others)?”
There is some rationale that says the manufacturing sector is worthy of the tax credit, he said. Manufacturing jobs are seen as good-paying ones that offer upward mobility and bridge the disparity between the rich and poor.
“But is it the best way of doing that or is there a better way?” Thornberg said.
The credit helps California stay competitive, Sutton said. Thirty-eight other states give manufacturers tax exemptions and credits, he said.
The idea is to stimulate business spending, said Cathy Browne, president of the California Plastics Extruders and Converters, a plastic-maker trade group based in Newport Beach. Browne also is general manager of Crown Poly Inc. in Huntington Park.
“It’s crazy to me why (the credit revival) is not a bigger deal,” she said. “Any business that knows about it uses it. We use it every year.”
Manufacturers might not be taking advantage of the credit because of the weak economy, she said. Companies must post a profit to take the credit, she said. Businesses with a loss can carry forward tax credits for up to eight years.
Tim Flathers, chief executive of Beach Manufacturing Inc. in Garden Grove, said the state should focus on making it easier for manufacturers to do business in California rather than spending time on the tax credit. Flathers, who says he doesn’t use the tax credit because it’s a paperwork nightmare that he doesn’t have time for, has given up on expanding his business here.
Flathers said he plans to move Beach, which makes recreational furniture and billiard tables and employs about 125 workers, to Arizona or Nevada when his lease is up in a few years.
