Compiled by Howard Fine
Businesses are keeping a wary eye on Sacramento these days.
That’s because Sacramento politicians,from Gov. Arnold Schwarzenegger on down,are talking about scaling back or eliminating tax breaks for businesses to plug a $16 billion budget hole.
These tax breaks are giveaways to some. But business owners say they’ve offset the cost of hiring dozens of employees and spending hundreds of thousands of dollars on research and development.
Other companies have used state tax credits to move into enterprise zones and hire local workers, or to purchase manufacturing equipment. They’ve also used tax credits to offset research and development costs or reduce taxes years after operating losses.
Statewide, these and several other tax credit programs cost California about $1 billion a year, a tempting target for budget savings. Last month, state Legislative Analyst Elizabeth Hill singled out “tax expenditure” programs for cuts in her proposal to bring the state budget into balance.
In most years, proposals to eliminate corporate tax breaks meet with stiff opposition from business groups and Republican elected officials who view them as tax increases. But in a speech late last month, Schwarzenegger said he would like to bring in as much as $2.5 billion additional dollars by closing “tax loopholes.”
“Even though I’m a Republican, I’m a big believer that when we have a financial crisis like this we all should chip in,” he said. “This is why I totally agree with the Legislative Analyst’s Office (official) when she says that we should look at tax loopholes. This is $2.5 billion we can give straight to education. I am totally for that.”
Schwarzenegger’s comments were greeted with dismay from Republican lawmakers and anti-tax advocates, who accused Schwarzenegger of backing away from the “no new taxes” pledge he campaigned on during the 2003 recall election.
“If you take away a tax credit, that’s a tax increase,” said Senate Minority Leader Dick Ackerman, whose district covers much of Orange County.
Business Reaction
The state’s major business groups are opposed to reducing or phasing out corporate tax breaks. They argue that doing so would be counterproductive, since businesses would decide not to expand at all or to expand elsewhere.
“The most important criteria to consider in evaluating tax credits and competing demands for resources is job growth and investment,” said Kyla Christoffersen, policy advocate with Sacramento’s CalChamber, formerly the California Chamber of Commerce. “Stimulating the economy is the only way California can generate the tax revenues it needs to run the state over the long term.”
What’s more, business lobbyists say, the state offers few substantial tax credits for companies to offset the high cost of doing business, particularly after the state eliminated the manufacturer’s investment credit during the last budget crisis four years ago.
“California manufacturers are already saddled with costs that run 23% above the national average, which helps explain why we’ve lost more than 400,000 manufacturing jobs since 2001,” said Gino diCaro, spokesman for the California Manufacturers and Technology Association in Sacramento. “These jobs are moving to more competitive states. We need the research and development tax credits to keep even more jobs from moving out of state.”
According to Legislative Analyst Hill, limiting the research and development tax credit to two-thirds of a company’s annual research and development expenditures would save the state $335 million in the next fiscal year starting July 1.
Hill also proposed limiting another lucrative tax benefit: net operating loss deductions. The state allows businesses that have net operating losses to “carry them forward” on their books and deduct them in future years when they are in the black.
By limiting those deductions to 50% of a business’ net income in the 2008 tax year, she estimated the state would gain $330 million in revenues for the 2008-09 fiscal year.
Another big revenue generator for the state would be to eliminate sales tax exemptions on the sale of manufacturing equipment, which Hill said would bring in about $145 million a year.
Scrapping this tax credit would discourage manufacturers from setting up shop or expanding here, since only a handful of states still tax manufacturing equipment, said diCaro of the California Manufacturers and Technology Association.
Finally, phasing out the controversial enterprise zone program would save the state $100 million in the 2008-09 fiscal year in hiring tax credits. Hill noted that the enterprise zone program,in which companies locating in so-called blighted areas can get tax credits of up to $36,000 for each eligible person hired from within the area,has been criticized in some quarters as having little effect in stimulating the economy.
In February, Schwarzenegger said he plans to renew Santa Ana’s designation as an enterprise zone for the next 15 years.
Fine is a staff writer with the Los Angeles Business Journal.
