Budget battle goes Hollywood

The painful piece of a two-part budget deal to get the strapped state some quick corporate cash in return for future tax breaks is poised to kick in. And Hollywood is playing a leading role.  

When Gov. Schwarzenegger and the Legislature struggled to balance the budget in the fall of 2008 and early 2009, they agreed on a series of corporate tax-code changes to get money into the state’s beleaguered General Fund, such as accelerating the pace of tax collections.

 In return, they promised to give businesses some $1.7 billion in new tax breaks in the future.

The future is almost here: Jan. 1, 2011.

The state budget is still in bad shape and the economy remains weak. Corporations are waiting for those tax breaks to go forward. The process of providing long-term benefits to special interests – corporate or otherwise — in return for a short-term budget fix is a familiar one in the Capitol.  

But there is a difference in this latest budget go-round: Hollywood and media groups are playing a major role to block a ballot initiative to eliminate those same tax incentives agreed to earlier by the Legislature and governor.

The political donors include high-profile Hollywood and media groups who have formed a group called “Stop the Jobs Tax.” The donors include Viacom, Time Warner, CBS, Fox, Walt Disney, Genentech, and GE’s affiliated entity Universal Studies – each of whom donated $100,000 to the opposition campaign.

The initiative “would take us back to the day when taxes penalized employers for hiring more people in California, when state tax law didn’t conform with federal law allowing losses to be carried over to help employers survive lean years, and when earned research and development tax credits could not be fully utilized,” said Teresa Casazza, president of the California Taxpayers’ Association.

The tax breaks – known as “loopholes” to some and “incentives” others — are intended to create jobs in the recession, corporate supporters say. But supporters of the initiative contend that the tax breaks are less about jobs than about public subsidies for businesses at a time when the public can ill afford it.    

“It’s a good down payment on a $20 billion budget gap,” said coalition spokesman Richard Stapler.  “The loopholes themselves were negotiated by the Legislature in a backroom during the past two budget cycles. It’s good to give the voters an opportunity to repeal them and provide much-needed funding for classrooms and other services.”

The provisions include a device known as the “optional single sales factor,” which allows some California companies – those that operate in at least one other state – to choose the method for calculating their taxable income in California.

Another allows companies to write off their operating losses against profits in either of the previous two years, with a phase-in beginning in 2011 and fully implemented for the 2013 tax year.

A third piece of the budget deal, which takes effect in the 2010 tax year, allows a business with credits exceeding its tax bill to shift the unused credits to another business in the same unitary (or combined) group.  “Currently, credits are restricted to the business that earns them,” the Legislative Analyst’s Office noted in its review of the proposed initiative.

Together, the proposals amount to about $1.7 billion in the first year, although they would be worth far more as time progresses. Critics contend that $2.5 billion annually is a more accurate price tag, and the LAO agreed that amount would increase in succeeding fiscal years.

Whatever the actual amount, however, the dollars represent roughly 10 percent of the state’s budget shortage.

Business interests say they negotiated in good faith with the Democrat-controlled Legislature and governor to help with the budget impasse, and now outside interests are going to the November ballot to renege on the agreement.  “A deal is a deal,” one noted.

A Democrat-backed group is circulating an initiative for the November ballot to block the series of corporate tax changes, arguing that the state’s finances are so dire that it needs every dollar. The proposed initiative would repeal key pieces of the 2008 and 2009 budget deals.

Legislation to repeal an array of business-driven provisions in the budget agreements, including those covered in the proposed November ballot initiative, was derailed last during the budget fight. That bill, SB 76 by the Senate Budget Committee, also sought to impose a 9.9 percent oil severance tax and a $1.50 per-pack tax on cigarettes.

The ballot proposal has received relatively little attention, in part because it is intended for the November election and has been overshadowed by the June primary election.

The timing is politically critical. Democrats hope the initiative, if it qualifies for the ballot, will help generate interest and support for Democratic candidates and cast Republicans as defenders of corporate greed.

In terms of corporate tax relief, initiative supporters contend that case is easily made. If these loopholes are not closed before they go into effect in 2011, they will cut corporate taxes in California by nearly 15 percent and not create new jobs – at a time when unemployment is high and the general economy weak.

Opponents of the initiative see it as a way of scuttling an agreement that was reached in good faith. The corporate interest agreed to changes they didn’t like in order to get a benefit down the road.

The initiative “would repeal some of the very tax reforms that are needed to get California moving again,” according to Stop the Jobs Tax, a business coalition that includes the Hollywood and media companies, along with the California Chamber of Commerce, the California Manufacturers Association and others.

“It’s all just a huge tax break for businesses. It’s not about creating jobs, and cutting their taxes doesn’t create jobs,”said lobbyist Lenny Goldberg of the California Tax Reform Association. “The issue is that this is just a huge windfall for those studios – they don’t have to do anything and they get a major cut.”

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