With State Coffers Full, Firms Seek Tax Breaks

Unions, school groups and advocates for the poor aren’t the only ones clamoring for the extra cash that has state coffers overflowing for the first time in years -- California’s biggest corporations are angling for the money too.

Southwest Airlines, Intel, the Motion Picture Assn. of America and many others are busily canvassing the Capitol for state dollars in the form of tax breaks. They are hoping legislative leaders will slip them some money in whatever budget deal is reached behind closed doors before the state’s July 1 deadline for putting a new spending plan in place.

“There is a little extra money in the budget and everybody wants these goodies,” said Tony Quinn, co-editor of the California Target Book, a nonpartisan elections guide.

Most corporate tax breaks have been dead on arrival at the Capitol in recent years, when the state was starved for cash. Now that tax receipts have surged and there’s a little extra on the table, there’s room to negotiate.

Businesses are asking legislators to give them a break on jet fuel prices, the cost of making movies and even leasing artwork, among other subsidies.

The proposals have mostly faltered in legislative committees. But they have been revived as legislative leaders begin cobbling together a budget and that angers the activists who worked to kill them in committee.

“It is a terrible way to do public policy,” said Lenny Goldberg, president of the union-backed California Tax Reform Assn. “They are trying to do a big runaround. This state’s worst tax policies have come out of budget deals.”

Driving their resurgence in the budget process is a crusade by Assembly Speaker Fabian Nunez (D-Los Angeles) to give film production companies tax credits -- or cash payments -- to keep their projects in California. The aim is to stop film companies from moving production out of state or out of the country. The price tag: roughly $100 million.

Nunez, who also pushed for the tax break last year, calls it a “necessary evil” to keep the industry in California. “I am going to work really hard to make it happen,” he said.

The California Teachers Assn. and liberal tax policy groups argue that it would lead to little more than cash handouts for productions that were never in danger of leaving the state. The state, they warn, could end up subsidizing pornography and other arguably offensive content despite efforts by the proposal’s supporters to exempt such productions. And they say many film companies that would benefit from the program don’t even pay taxes in California, thanks to complex Hollywood accounting procedures that allow them to shift profits to states with lower tax rates.

Nunez also faces another obstacle: anti-tax Republicans, whose votes can usually be counted on for tax breaks, are skeptical. They say other industries are more deserving of relief. The price of their support? More tax breaks.

The speaker says they could be granted. A proposal to revive a controversial tax break for the purchase of factory equipment, for example, has already become part of budget negotiations. The tax break expired in 2003 after it failed to create the jobs its backers promised, costing the state billions of dollars over the decade it was in place.

Since then, the California Chamber of Commerce, the California Taxpayers Assn. and many companies, including Intel and Lockheed Martin, have worked to get the credit restored. Now, a scaled back version of it may return.

“We are open to it,” Nunez said. “We’ve been talking to the Republican leadership about it.”

Senate Leader Dick Ackerman (R-Irvine), the lead GOP budget negotiator, would not say what exactly his caucus is hoping to extract by the deadline for passing a budget. But he acknowledged that tax breaks are in the mix. “We are exploring various options,” Ackerman said. “...We’ve got some money this year, so that always helps.”

Nunez says Democrats would only support limited measures that would cost tens -- not hundreds -- of millions of dollars, what legislators call “budget dust.”

Goldberg is skeptical.

“They talk that way every time,” Goldberg said. “That is just to get their foot in the door. Then they say, ‘it doesn’t create enough of an incentive at this level, we need more.’ ”

Despite the extra cash the state has lying around this year, multibillion-dollar deficits are still projected well into the future. Any tax breaks passed will cause next year’s shortfall to grow, putting pressure on legislators to cut government programs next year. And the surge in revenue could be fleeting. The new revenues would quickly evaporate if the stock market has a bad year or the housing market collapses.

“These additional revenues are all bubble revenues,” said UC Berkeley professor of public policy John Ellwood, “that are coming from stock market gains and the housing market. They could disappear tomorrow.”

Even so, legislators are also looking at giving airlines a $143-million break. Southwest, United, Alaska, American and other airlines are seeking relief from the sales tax on gasoline, which has surged along with jet fuel prices. The fuel averaged well under $1 a gallon until 2002. Now it is nearly twice that. As a result, the companies are paying millions of dollars more in taxes on gasoline than they or state experts ever projected.

The tax break “is something we definitely should take a look at,” Nunez said.

A diverse group of California’s largest corporations, meanwhile, have been rallying around a proposal to tax multi-state companies differently. The idea would be to calculate their state tax bill based on sales rather than the current formula that also considers size of the workforce and property holdings. Supporters say that firms would be more willing to expand their operations in California if their tax bill didn’t grow exponentially when they hires more people and built more facilities here. Disney, Intel, Apple Computer, Genentech and many other of the state’s corporate giants are pushing the proposal.

“I definitely hope this is the year” such a tax change is enacted, said Eric Miethke, a lobbyist for Business for Economic Growth in California, a coalition of companies pushing for the change.

Andrea Jackson, associate director of government affairs for Genentech, said the proposal is “alive as anything can be this time of year.... I think it has some honest legs.”

The change, however, has opposition from unions and advocates for the poor. Critics say that in other states where it has been tried, the shift amounted to a big tax break for companies without generating economic growth.

Eugene Corrigan, a former executive director of the Multistate Tax Commission, a nonpartisan agency consisting of state government officials, wrote in the newsletter State Tax Notes that the change is “one way states manage to shoot themselves in the foot, reducing their ability to fund public needs.”