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Davis Plan to Raise Taxes Doesn't Hit Businesses

Corporations would keep breaks adopted since the '80s. The idea is to fuel job growth, but critics say the burden should be shared.

January 13, 2003|Doug Smith and James F. Peltz | Times Staff Writers

While calling on taxpayers to make sacrifices on many fronts, the budget unveiled by Gov. Gray Davis last week steers clear of any new demand on corporate income, one of the deepest pockets it could have tapped to help close the state's revenue shortfall.

Under the Davis plan, wealthy individuals would give up more of their income and everyone would pay a higher sales tax on goods. Corporations would face no change in their historically low level of taxation, although they also would pay a higher sales tax.

Davis' reluctance to tamper with business taxes reflects a nationwide shift away from fiscal policies that take more from the wealthy, a trend illustrated in President Bush's proposal to drop taxes on stock dividends.

Caught between pressure from taxpayer associations that want business to pay a larger share and from business groups that complain about excessive taxation, Davis has opted to leave in place a series of tax breaks and tax rate reductions adopted since the 1980s.

The budget reflected Davis' unwillingness to tamper with the tax burden borne directly by business at a time when the economy is foundering. He wants "to get people working, and adding additional taxes to businesses is not going to help us accomplish that goal," said Davis spokeswoman Hilary McLean.

Those who think low-wage earners are overtaxed say corporations should bear the pain along with individuals.

"If we're looking at increasing those taxes that would primarily affect low- and middle-income families, we should also look at the fact that corporations are paying a smaller share of their profits today than they were a decade ago," said Jean Ross, a former Assembly tax consultant who heads the nonprofit California Budget Project, which studies the budget's impact on the poor.

Combined with federal tax reductions, the changes mean California corporations are paying a far smaller percentage of their profits in taxes today than at any time since the 1950s. Actual corporate taxes peaked in 1981, when nearly one out of every $10 in net corporate revenue went to the state. Today the rate is about half that.

Corporation taxes have also declined both in total dollars and as a share of the state's revenue. The slack has been taken up by a dramatic rise in personal income tax.

Using figures from the Franchise Tax Board, Ross calculates that a return to the peak corporate tax burden in 1981 would generate $4.7 billion in new revenue.

Critics of tougher corporate taxation question that conclusion. The reductions in corporate taxes reflect many factors that state policy could not touch, they say, including changes in federal law and economic trends such as greater borrowing and lower profit margins.

Many economists shy away from higher corporate taxation because of its potential to make California less competitive in attracting business.

"In general, I think economists are not big fans of state corporation income taxes because we view businesses as more mobile than individuals," said Alan Auerbach, the Robert J. Burch professor of economics and law at UC Berkeley. "We worry about the incentives for business to locate elsewhere."

Typically, taxes on business profits are attractive to Democrats because they fall most heavily on the wealthy.

But Davis signaled his sympathy for the competition argument when he declared in his State of the State address Wednesday: "My most immediate priority can be summed up as jobs, more jobs, and even more jobs."

He reinforced the point by recommending extension of the manufacturers' investment credit, a $410-million tax break that business is loathe to give up.

"This credit is widely recognized as creating hundreds of thousands of new jobs," Davis said.

Overall, Davis knew that it would be a hard sell to raise business taxes and push for higher employment at the same time, said Richard Lehman, a business lobbyist and former state legislator.

"If he had gone the other way, it would have been contrary to his message of new jobs," he said.

The Wine Institute, which represents more than 600 wineries involved in California's $13-billion wine industry, was among those whose lobbyists made it clear to Davis that higher taxes would be political poison among its constituents, including the industry's 145,000 employees.

"We're very price-sensitive right now," said Wine Institute President John De Luca, noting that his industry is fighting flat sales. "If you add to the cost of buying a bottle of wine in a store or in a restaurant, you can see how it depresses consumption."

That doesn't mean vintners and other businesses wouldn't be hurt by Davis' plan. That bottle of wine would still cost consumers more under Davis' plan to hike the sales tax by a penny. (Combined with local taxes, state sales taxes now range from 7.25% to 8.5%.) And the impact could be felt most by industries making and selling big-ticket items such as cars, appliances and furniture.

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