Bill Giving Big Tax Cut to Global Firms Passes State Senate

The state Senate, in a move some lawmakers said would help the state attract foreign investment, approved controversial legislation Tuesday that would provide a huge tax break for multinational corporations.

The hotly debated measure, which would allow corporations to decide whether they want to continue to be taxed under the state’s controversial unitary method of taxation, was approved on a bipartisan 24-12 vote.

Foreign business leaders have been protesting the tax for years, claiming that it is unfair because it bases their corporate taxes on worldwide earnings and assets rather than just on the amount of business done in California.

Under the bill by Sen. Alfred E. Alquist (D-San Jose), multinational corporations electing not to be taxed under the unitary method would pay taxes only on business done within California.

The bill would save corporations an estimated $1.4 billion in taxes over a three-year period, beginning in fiscal 1986-87, according to the Franchise Tax Board.

Foreign Firms

Although California and U.S.-based corporations also would benefit, most of the tax breaks are expected to go to big foreign firms. The measure has been intensely lobbied by foreign and domestic corporations.

Japanese firms like Sony Corp. have argued that the unitary tax has caused business leaders to locate in such states as Oregon and Washington, which do not levy unitary taxes, and maintain that the tax will continue to be a deterrent to investment in California until the Legislature acts.

That was the argument used by Alquist. He said the unitary bill is “a necessary step in improving our trade relations with many of our foreign country friends.”

Alquist said the unitary fight is far from over, as the legislation heads for the Assembly and new tests. Last year, the Senate passed a similar bill, but it died in the Assembly. Alquist said he expects the bill to be substantially amended in the lower house.

One of the expected Assembly amendments is some kind of provision requiring corporations electing to get out from under the unitary tax to pay a fee that would partly cover the loss of revenues by the state.

Alquist said talks are continuing in efforts to “strike a compromise on this legislation that will suit nearly everyone.”

Gov. George Deukmejian, under pressure from the Reagan Administration, which claims that the tax is hindering U.S. efforts in international trade talks, also has been pushing for unitary tax relief. He has been attempting to negotiate a compromise bill with Senate and Assembly leaders and has not taken a position on the Alquist bill.

Opponents of the bill argued that the state could not afford to grant such a large tax cut and said proponents had not made good enough arguments to justify it.

Sen. Gary K. Hart (D-Santa Barbara) argued that California, despite its taxing system, is still the nation’s leading state in attracting new business investment.

Welfare Program

Hart likened the tax break bill to the welfare program Aid to Families with Dependent Children, calling it “aid for foreign dependent corporations.”

Others who voted against it said they favor changes in the unitary system but believe that a bill favoring foreign corporations would put California firms at a disadvantage.

Domestic corporations want the bill amended in way that would allow them to escape state taxes on foreign income. This would provide an additional tax break in the range of $90 million a year, according to estimates.