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Mixed Reviews on Tax Cut Plan

A state performance report says a factory and telecom credit would pay for itself, but critics disagree.

August 13, 2004|David Streitfeld | Times Staff Writer

To meet its goal of guiding the state's bureaucracy into the 21st century, the California Performance Review has come up with more than a thousand recommendations, nearly all of which are designed to save money by consolidating, improving or eliminating government functions.

One proposal is different.

It calls for a corporate tax cut that would drain the state's depleted coffers by as much as $400 million a year.

Proponents of the measure, which would eliminate the sales tax on manufacturing and telecommunications equipment, say it would more than pay for itself by creating 25,000 jobs a year.

Opponents say that targeted tax cuts never pay for themselves and that the tax-relief proposal reveals much about the secret way the performance review was assembled over the last five months. Public debate gets underway in Riverside today with the first of five statewide hearings.

The 1,200 proposals in the performance review -- the cornerstone of Gov. Arnold Schwarzenegger's plan to "blow up the boxes" of state government -- were assembled by 275 public employees and consultants. The governor said this week that he was mulling over whether he should bypass the Legislature and take the review directly to the voters as a ballot item.

When the plan first leaked to the media two weeks ago, there was immediate controversy over the access given to high-tech corporations, including Microsoft Corp. and Hewlett-Packard Co., during its drafting. Many of the proposals call for expanding the state government's use of the Internet, a step that could be a windfall for high-tech service providers.

But of all the items in the 2,500-page review, few would be as beneficial to as many businesses as the tax cut. Schwarzenegger has not endorsed or rejected any of the proposals.

Walter Barnes, chief administrative officer for the state controller's office, headed the team preparing the section of the performance review that includes the tax cut. He said he couldn't remember exactly how the measure first surfaced. But it's clear whose ideas are being endorsed.

"We were out doing a lot of shouting," said Dorothy Rothrock, vice president of government relations for the California Manufacturers and Technology Assn., a Sacramento-based trade group.

The performance review bases its tax-cut recommendation on a study by the Milken Institute, a Santa Monica think tank. But the review never mentions that the study was commissioned by the manufacturers association.

Thirteen of the 15 footnotes in the two-page recommendation refer to the association, its members or the Milken report. No critics are cited.

California has a growing reputation as a difficult and expensive place to run a business, a notion that the proposed tax cut -- as well as the performance review itself -- is trying to address.

Giving a tax break to manufacturers is hardly a new concept in California. A manufacturers' investment tax credit, or MIC, arose out of the recession of the early 1990s, another bad time for factories. More than a quarter-million manufacturing jobs were lost around the state during those years, many of them in aerospace and defense.

Passed in 1994 as part of a stimulus package, the MIC effectively cut the price of manufacturing equipment 6%.

Although aerospace continued to struggle, the following years were good ones for high-tech manufacturing in the state. Industry attributed some of that to the MIC.

Intel Corp., which had been one of the chief lobbyists for the MIC, said its passage encouraged the chip maker to immediately invest $700 million in a Santa Clara, Calif., plant. Subsequent Intel investments in Santa Clara and Folsom, Calif., totaled an additional $2 billion.

But the MIC wasn't designed to be permanent. Rather, opponents of the tax break made sure it was enacted with a sunset clause, causing it to expire if all manufacturing employment (aside from aerospace, which seemed to be in terminal decline) fell below a certain point.

That would be proof, the MIC's foes said, that the measure wasn't working. In 2003, after three years of rapid employment decline, the trigger was reached.

Despite extensive lobbying -- the manufacturing association called for doubling the credit instead of killing it -- legislators decided that the state's fiscal needs were paramount. They said they could no longer afford the MIC, and allowed it to lapse.

Now the performance review wants to bring the MIC back -- and in expanded form. Instead of a tax reduction that can be used only by profit-making businesses, even money-losing start-ups would get a refund on the 5% of the sales tax that goes to the state. (The portion of the sales tax that goes to local communities would still be charged.)

The resurrection puzzles longtime MIC foes such as Jean Ross of the California Budget Project, a Sacramento watchdog group for low- and middle-income people.

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