SACRAMENTO — Shortly after California passed its penny sales tax in 1933, state officials began to fear that Hollywood's disgruntled movie moguls might do something extreme.
"The state of Florida is very anxious to get the motion picture industry . . . and if we set up a tax on one of their supercolossal $7,000,000 productions, they would no doubt transfer their operations to that state," one state official wrote after a series of meetings with angry industry representatives.
The result: a 1938 ruling by the State Board of Equalization giving the state's most glamorous industry a sales tax break on virtually everything but undeveloped film--the first of several major loopholes that have been opened over the years to keep the movie business in California.
So it goes in the world of state and local taxes, where for decades industries and individual businesses have fought taxes by threatening to pack up and head for Mexico, Washington, Nevada, Oregon, New Mexico, Utah, Texas or the Deep South.
Dubbing such threats in 1959 the "counsel of fear," Gov. Edmund G. (Pat) Brown swept them aside when he called for higher taxes to build highways, universities and aqueducts. And for 40 years, economists have insisted there is little or no evidence that state and local taxes matter much in corporate decisions to relocate, instead representing just one of the many marginal costs that businesses weigh.
Yet the threats have persisted for decades. And they have worked.
In the 1960s, California lawmakers repealed the property tax on inventories after businesses such as Burroughs Corp. warned they would send their stock to warehouses in Nevada.
In the go-go 1980s, legislators relaxed the state's controversial method of taxing multinational firms based on worldwide payroll--in part because Japanese companies threatened to invest their newfound wealth elsewhere.
Now, in the recessionary 1990s, lawmakers have done it again, passing a bill that will give up to $1 billion in tax breaks over the next four years on everything from new manufacturing equipment to commercial rockets launched from Vandenberg Air Force Base.
The omnibus tax bill, cobbled together in the waning hours of the 1993 legislative session last month, capped a year in which legislators were openly nervous about the state's newest corporate stars: footloose high-tech and biotechnology firms.
In April, their worst fears appeared to come true when Intel Corp. of Santa Clara, the world's leading manufacturer of computer chips, announced that it would pass up the Golden State to build a $1-billion fabrication plant expansion in New Mexico. Intel claimed the move would save $130 million in taxes.
Accompanied by strong rhetoric, Intel's announcement struck a raw nerve in Sacramento, where lawmakers worried about California's reputation as a tax-plagued state already had introduced an unusually high 89 bills calling for business or individual tax cuts totaling as much as $7 billion--more than twice what is paid to welfare recipients.
Chief among the measures was a bill by Assembly Speaker Willie Brown (D-San Francisco) exempting businesses from paying $1.2 billion in sales taxes on equipment purchases. Although the break was cut in half and its effective date delayed until 1995, it was still the biggest element in the omnibus bill, which Gov. Pete Wilson signed into law Wednesday.
Brown carried the measure for the 800-member California Manufacturers Assn., one of Sacramento's most powerful lobbying groups. The association argued that without significant tax relief, California would be unable to stem what they contend is an exodus of employers willing to take their $12- to $27-an-hour factory jobs to other states--25 of which exempt business purchases of equipment from their sales taxes.
Business groups such as the San Joaquin Valley's poultry farmers picked up the beat, saying they too were feeling a bit of wanderlust--a condition that could be cured if the Legislature came through with a $600,000 sales tax break on the rice hulls used as "chicken litter" in their barns.
California, they argued, was the only poultry state that taxed the hulls, which are converted into fertilizer after soaking up chicken and turkey droppings. The tax contributed to high production costs that have run two Louis Rich turkey processing plants out of the state, the farmers claimed.
"The Legislature not approving something like this would send a tiny signal to the poultry industry that . . . they don't care whether they remain in California or not," said Bill Mattos, president of the California Poultry Industry Federation in Modesto.
The Legislature passed the bill, and Wilson signed it last month. Gov. George Deukmejian vetoed a similar measure in 1987, citing his concern about opening new loopholes in the tax code.