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State's Help for Business Seen as Watershed Shift : Legislation: Economists say support for pro-growth package was astounding. They see trend lasting years.

September 13, 1993|DONALD WOUTAT | TIMES STAFF WRITER

SACRAMENTO — The California Legislature's 1993 session so exceeded the expectations of those trying to fix the battered economy that it is being described as a watershed in the state's posture toward business.

Economists said the bipartisan actions completed early Saturday confirm a shift toward pro-growth policies in California and away from a dominant emphasis on environmental and social concerns that has characterized state policy for years.

"We've gotten ourselves into such an awful mess that this has become a very powerful coalition of business and labor and Democrats and Republicans. I don't expect to see this reversed for several years," said Larry Kimbell, director of UCLA's Business Forecasting Project.

Author Joel Kotkin, a California economic historian and a fellow at the Center for the New West, said: "That the Democrats, and especially (Assembly Speaker) Willie Brown, have supported this is astounding. This is a state that is trying to save itself."

Virtually every major complaint from business leaders in California and elsewhere was addressed by lawmakers in a package that Gov. Pete Wilson is to sign today in Los Angeles.

The occasion is an expected announcement by Hughes Aircraft Co.--which is moving thousands of manufacturing jobs out of the state--that it has taken its Los Angeles headquarters off the sales market and will keep its main offices here as a result of the various pro-business signals from political leaders.

State officials predicted over the weekend that the legislation will lead to quick results in corporate decision-making. Though the longer-term effects are disputed, one optimistic study says the changes will spur investment that could create half a million jobs by 2004.

For example, changes to the controversial unitary tax--a levy against multinational companies based on their worldwide earnings--bear directly on about 80 projects worth $500 million that foreign firms are considering for California, said Julie Meier Wright, director of the state Department of Trade and Commerce.

"There are several companies I'm putting at the top of my list to call this week" to notify them of the changes, Wright said.

In approving this package, political leaders were responding to the dramatic downturn in California's economic fortunes in the past three years. A costly tax and regulatory system was aggravating the effects of the recession and of defense cutbacks, triggering a flight of business and jobs out of the state and discouraging other companies from coming here.

Kimbell noted that state officials can only change conditions marginally and that California remains vulnerable to such powerful forces as the recession, defense cutbacks that ravage the aerospace industry and downturns in Japan and Europe that are hurting exports.

But the business lobby was ecstatic about the changes, which were described as unbelievable, and spectacular by William Campbell, president of the California Manufacturers Assn.

Traditionally a Republican concern, the state's poor business climate has increasingly attracted the attention of labor leaders and Democrats. The first major step was the Democrat-controlled Legislature's overhaul of the costly, much-maligned workers' compensation system, signed into law by Wilson in July.

The investment tax credit was another unexpected gain for business because massive budget problems had seemed to rule out significant tax relief this year. Lawmakers approved creating a 6% investment tax credit on purchases of equipment, effective Jan. 1, 1994. It encourages businesses to invest in new equipment by granting a credit of 6% of the cost of new equipment against income taxes.

Manufacturers had sought an upfront sales tax exemption on the purchase of equipment because they would realize the savings immediately. Nonetheless, the investment tax credit will save businesses nearly as much--while delaying the state's tax-revenue loss until 1995.

The lack of a tax break on equipment purchases was the major reason cited by Intel Corp. this year when it decided to build a $1-billion manufacturing plant in New Mexico rather than California. The state's sales tax on equipment for the plant would have cost Intel more than $70 million.

The tax credit will help small firms and their suppliers as well. Bob Ulrickson, president of Logical Services Inc., a Santa Clara software engineering and electronic firm, said he will spend about $20,000, or 40%, more on new equipment next year than he would have otherwise.

"We're quite pleased," Ulrickson said.

Start-up companies can instead choose a 5% sales tax exemption. And to take care of unprofitable firms that have no income tax to claim a credit against, the investment tax credit can be carried forward as long as 10 years.

The changes to California's unitary tax were aimed at averting an international tax dispute between the United States and Britain and heading off a potential $4-billion state liability from two court cases.

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