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California budget plan includes corporate tax breaks, individual tax hikes

Business would get nearly $1 billion in breaks, while the average person would pay higher taxes five ways. Republicans say the plan would create jobs, but others dispute the claim.

February 14, 2009|Evan Halper

SACRAMENTO — The average Californian's taxes would shoot up five different ways in the state budget blueprint that lawmakers hope to vote on this weekend. But the bipartisan plan for wiping out the state's giant deficit isn't so bad for large corporations, many of which would receive a permanent windfall.

About $1 billion in corporate tax breaks -- directed mostly at multi-state and multinational companies -- is tucked into the proposal. Opponents say the breaks will do nothing to create jobs, and the Legislature has rejected such moves repeatedly in the past. But now, to secure enough Republican votes to pass a budget that would raise taxes on everyone else, the Legislature is poised to write them into law with no public hearings at a time when the state treasury is almost out of cash.

The tax breaks were inserted into the spending plan during private meetings between legislative leaders and Gov. Arnold Schwarzenegger. Less than 24 hours before today's scheduled vote, the proposals had not yet been printed in bills and made available to the public, but legislative leaders acknowledged them.

Most of the cost to the state -- or $690 million -- would come from changes in the way corporate taxes are computed, lowering the amount owed by many large companies. Smaller tax breaks are included for Hollywood production companies and small businesses that hire new employees.

"This is a pure giveaway for the vast majority of corporations that will benefit," said Lenny Goldberg, executive director of the California Tax Reform Assn., a union-backed nonprofit. "They will walk away with a great deal of money at everybody else's expense."

GOP lawmakers, aided by a small group of Democrats, have been pushing the tax breaks for years, along with such companies as NBC Universal, Genentech and Intel, as well as the California Chamber of Commerce and the California Taxpayers Assn. They say the breaks are an incentive for businesses to expand operations in California -- or at least not to leave.

The lawmakers have previously sought unsuccessfully to leverage their votes on a state budget, which can pass only with a two-thirds majority, for the tax breaks. This year they had more leverage, because the compromise requires them to support $14 billion in temporary tax hikes on average Californians, something they had vowed never to do.

Those tax hikes will force most California adults to pay hundreds, if not thousands, of dollars more each year in a combination of higher vehicle license fees, sales taxes, gasoline taxes and income taxes. Dependent-care credits claimed by millions of families would be cut by about $200 annually. The increased taxes would remain in effect for two to four years.

Assemblyman Nathan Fletcher (R-San Diego), said the proposed corporate tax breaks are intended to keep the recession from spiraling deeper in California while unemployment is soaring.

"We have a tax code that incentivizes moving jobs out of the state," he said. "It only makes sense to change that. . . . We want to be a state that welcomes job creation. The benefits of this will be substantial."

Under the proposed changes, companies would no longer be required to pay state taxes based on a formula that includes the size of their workforce, the amount of property they own and their total California sales. Instead, they could pay based on total state sales alone. The idea, supporters say, is to stop penalizing companies for expanding their workforces and building new facilities in California. Under current law, the companies' state tax bills grow when they do those things.

Supporters note that Genentech and Intel, two big California companies, have both built major facilities out of state, citing California's tax policy as a reason.

"We need to be able to compete more effectively with other states," said Jim Hawley, senior vice president at TechNet, a coalition of high-tech executives.

He said that in California the technology industry has been far slower to rebound from the dot-com bust earlier this decade than it has in states that have made the changes lawmakers are considering.

But a study by the Center on Budget Policy Priorities, a Washington, D.C., think tank, concluded that the cost of the tax break has far outweighed the job-creation benefits in states where it has been instituted. The center researches how tax policies affect low-income Americans. The study said many companies were using the tax formula to lower their tax bills without doing anything they wouldn't normally do to create new jobs.

Other experts have said the change could also mean that companies that put a heavy burden on -- and extract substantial benefit from -- state services won't be paying their full share for them.

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