State budget: Tax fight spreads from Capitol to the ballot box

Major corporate tax breaks that were negotiated during two state budgets face new opposition this year in the Capitol as the state’s fiscal condition deteriorates. The battle is evolving on two fronts – in legislation and on the November statewide ballot.

Targeted are the single sales factor, which allows a company to choose how it will be taxed; the loss carry-backs, which allow a company to calculate its losses and get refunds for taxes paid previously; and the sharing of a company’s tax credits with its affiliates. The series of tax breaks, sought by business and backed by Republicans, were grudgingly negotiated in September 2008 and February 2009 by the Democrat-controlled Legislature to woo GOP votes and get a signature from Republican Gov. Arnold Schwarzenegger.

The breaks, which would cost the state about $1.7 billion by the most conservative estimates – others say they are worth $2 billion, or more – are scheduled to kick in starting in January.

But opposition to relinquishing the money at a time when the state faces an unprecedented shortfall is picking up steam, at least from Democrats. The shortage is about $20 billion, or more than a fifth of the General Fund, the state’s principal treasury that includes money from income, sales, insurance and corporation taxes.

Doubling their anger is the way in which the tax breaks were negotiated. “They were secret, backroom deals that were negotiated in the dark of night. They were negotiated without scrutiny, without any hearings, without anybody seeing the language,” said lobbyist Lenny Goldberg of the California Tax Reform Association, which has criticized the corporate tax breaks.

Two bills to eliminate or limit the single sales factor and the loss carry-backs already have emerged from the Assembly Revenue and Taxation Committee. Both measures, by Assemblyman Kevin de Leon, D-Los Angeles, are headed for the Appropriations Committee.

As the May Revision approaches, the discussion in the Capitol appears to be following traditional paths: The administration and Republicans are talking cuts – a spokesman for Republican Gov. Arnold Schwarzenegger told the Los Angeles Times that they were “absolutely terrible cuts” – and the Democrats are talking new tax revenue.

The taxes-versus-cuts debate, a fixture in the Capitol’s annual budget battles, has a slightly different cast this year. The tax debate is being framed as a debate not over new taxes but over loopholes. On the Republican side, the expansion of existing loopholes – or “tax incentives” as they are known in the Capitol – is viewed as a way of creating jobs. On the Democratic side, closing the loopholes is seen as a question of fairness.

A dozen bills authored by Republicans to provide an array of tax breaks on vehicle purchases, health-care accounts, manufacturing equipment sales, a repeal of a portion of the sales and use tax and a property-tax exemption for seniors awaited action this week in a Senate committee. One bill would repeal the 20 percent penalty for understating the state tax liability, a move that would cost the state $760 million the first year, according to a Senate analysis.

Republicans said the package would stimulate job growth as the state grapples with the recession, while Steinberg’s office said the Republican tax package would “blow a gigantic hole” in the state’s deficit-riddled budget.

The Republicans’ contention that the package would encourage job and investment growth drew sharp fire from Steinberg’s office, which noted that Moody’s economist Mark Zandi, who advised Republican Sen. John McCain’s 2008 presidential campaign, said corporate tax cuts generate about 32 cents for every dollar invested.

The search for dollars is likely to result in shifts from a variety of special funds to provide money directly to the state’s General Fund or to ease the state’s obligation to make payments to some programs. The largest shift, authorized by the courts, entailed a $1.7 billion transfer in local redevelopment funds, but Capitol sources say a series of other special-fund transfers are in the works. The special funds reflect money that is collected for a specific purpose – such as fees to regulate specific industries or taxes paid to support transportation or law enforcement.

As the legislative and political wrangling took hold in the Capitol, there was a move to get voter approval to repeal the entire package of tax breaks approved in the earlier two budgets.

A coalition backed by the California Teachers Association submitted signatures this week to repeal the entire corporate tax-break package that was negotiated in September 2008 and February 2009. The measure is aimed at the November general election ballot.

It would repeal the current law allowing multi-state businesses to calculate their income based on sales rather than on a combination of assets, payroll and sales, blocking the ability of a company to share tax credits with affiliated corporations and repeal the provisions allowing companies to shift their operating losses to prior tax years.

Schools, among others, have fought the corporate tax breaks because the revenue declines threaten education, social service and other programs.

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