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Cost to California of tax breaks for green-tech equipment questioned

Schwarzenegger and legislators say the state won't lose a cent because the credits will lure firms and create jobs. But economists and other experts say the claim is misleading.

March 27, 2010|By Shane Goldmacher

Reporting from Sacramento — Gov. Arnold Schwarzenegger and state lawmakers say new tax breaks they created this week for so-called green businesseswon't cost taxpayers a cent.

But economists, tax experts and budget analysts say such a claim is misleading.

The new law allows companies to forgo paying sales tax on any green-technology manufacturing equipment they buy. There is no limit on how much machinery is eligible for the exemption. And rules governing what corporations can qualify leave room for businesses beyond solar, wind and geothermal companies to avoid the taxes.

Some say the assertion that the new tax break will cost nothing is overly optimistic, if not deceptive.

"I don't understand why they would suggest that," said Alan Auerbach, a professor of economics at UC Berkeley.

The tax breaks were added to a midyear budget package to win Schwarzenegger's support. In closed-door talks, Democratic lawmakers had cautioned that they were giveaways and pushed unsuccessfully for a cap. They settled for a bill, SB 71, that expires after 10 years.

"SB 71 will send a clear message to every CEO and every entrepreneur and innovator that if you invest in the clean future of California, then California will invest in you," Schwarzenegger said when he signed the bill Wednesday at a solar plant in San Jose.

Proponents say the legislation helps solve global warming and creates business. It passed the Legislature unanimously.

The tax breaks will "have no impact on the budget," the state Finance Department said in the bill's official analysis, because they will apply only to projects that "would not have occurred" otherwise. Any new jobs created, therefore, would bring in extra taxes.

But Auerbach said it is "impossible to tailor a tax credit" so narrowly.

A state tax board estimated that in 2008, the latest year for which data are available, California would have forfeited $13.5 million if the measure had been in place and all green-tech purchases were exempted.

That is a tiny fraction of the state's nearly $90-billion annual budget. But the deficit is so severe that the importance of every dollar is magnified. A $16-million cut to domestic violence programs last summer, for instance, threatened to shutter 94 shelters statewide.

"The idea that the Legislature is passing tax breaks in the midst of an ongoing budget crisis violates the old adage that the first thing you need to do when you're in a hole is stop digging," said Jean Ross, executive director of the California Budget Project, which lobbies for low-income families.

Past California tax breaks pitched as relatively inexpensive have mushroomed into costly programs, such as those given to businesses located in "enterprise zones." That tax break now costs the state $400 million a year, according to the nonpartisan Legislative Analyst's Office.

"If you're guessing wrong about the scope of the credit and it turns out it applies to a lot more investments than you thought . . . you may end up losing a lot of money," said Auerbach, the Berkeley economist.

Backers of the tax breaks argue the bigger the better. "Green technology is where the action is," Schwarzenegger said.

Proponents say the credits will lure solar, wind and other green-tech firms that would otherwise set up shop in nearby states, such as Arizona and New Mexico. California is one of only three states that force companies to pay taxes on green-tech machinery, they add, giving the Golden State a disadvantage in a budding sector.

The law has entrusted an obscure state panel, chaired by state Treasurer Bill Lockyer, with determining which companies and projects will qualify for the tax credits. Democrats said they will rely on his good judgment in picking worthy businesses.

"I have complete faith that Bill is sensitive to the budget situation," said Senate leader Darrell Steinberg (D-Sacramento).

The rules are open to interpretation. For instance, would an oil company qualify with new machines adding ethanol to its fuels?

"Unlikely," said Lockyer, though he wouldn't pass any final judgments. "It's not just going to be dropping money from helicopters."

But Lenny Goldberg, executive director of the California Tax Reform Assn. and a critic of corporate tax breaks, said that "when you've got this kind of money on the table, you can be sure there'll be heavy and intense pressures."

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