Working to Repeal Measure : Lobbyists Reap Bonanza From State’s Unitary Tax

The lobbying business has never been better here, and a major reason for the bonanza is the campaign to repeal the unitary tax on multinational corporations.

Legislators and their staffs have been wined and dined. Hundreds of thousands of dollars in campaign contributions have been made. And at least two dozen contract lobbyists have been employed, for substantial fees, in the effort to enact what could be an annual $500-million tax break for the multinationals.

The unitary tax issue has become known around the Capitol as a full employment program for lobbyists. At issue is the unitary system, wherein multinational firms pay taxes to California based on their worldwide income. That means, for example, if 10% of a global corporation’s sales, payroll and property are in California, the state assesses its corporate tax rate against 10% of the corporation’s entire income.

The issue has made lobbyists here extremely happy. Said one, who requested anonymity because of possible professional repercussions, “This is the greatest moneymaking operation for the Third House that we’ve had in years. You have a lot of companies wanting something, and you have a lot of lobbyists waiting to take their money.”

Another, also requesting anonymity, said fees from corporate clients pressing for unitary repeal are steady checks that “help keep the lights on.”

Earlier this year, a legislative tax consultant drew up a list of those lobbying the unitary tax issue and came up with 141 names, among them the son-in-law of the President, several ex-legislators and a handful of former high state officials.

The list, of course, was not limited to registered lobbyists. Also represented were consular officials of foreign governments, executives of some of the world’s largest corporations and members of the Japanese House of Representatives.

The intense lobbying campaign has been under way for several years, but it picked up last year when Gov. George Deukmejian made it clear he would support some kind of unitary tax relief for foreign-based multinational corporations.

Last year’s bill passed the Senate, but died in the Assembly on the last day of the legislative session. This year, the Senate again passed a repeal bill. The bill by Sen. Alfred E. Alquist (D-San Jose) awaits a hearing Aug. 19 in the Assembly Revenue and Taxation Committee and lobbyists are pressing hard for legislation that will give their corporate clients the largest tax break.

Effect on Other Programs

Whether they succeed remains to be seen. The revenue loss would be felt by other state programs, critics claim, even though the state has a $1-billion budget reserve that would help cushion the shortfall.

The unitary tax has bedeviled accountants, enraged foreign governments, and been the point of contention in a series of lawsuits dating back to the 1940s.

Corporations have gone to court claiming the tax is unfair, challenging the state’s right to extend its taxing authority beyond the Atlantic and Pacific and arguing that it violates international trade treaties.

But the courts consistently have ruled in the state’s favor, and California tax officials claim that without the unitary system corporations could use accounting tricks to shift profits from one subsidiary to another and escape taxes altogether.

Having failed in the courts, the corporations have mounted a national campaign to change the law in individual states. Five states in the last year have modified their unitary tax, leaving only seven states--California being by far the largest--that still use the global accounting method.

At this point, the protagonists in California’s unitary tax debate are the corporations that would benefit most by the legislation.

On one side are foreign multinational corporations, like Japan’s Sony Corp. and the Netherlands’ Royal Dutch Shell Group, parent of Shell Oil Co., and Great Britain’s Barclay’s Bank. They support the limited repeal proposal contained in the Alquist bill and backed in concept by Deukmejian. The principle involved is that the foreign firms won’t be taxed on any business activities beyond the so-called “water’s edge,” or the boundaries of the continental United States.

On the other are domestic corporations, such as Hewlett-Packard Co., the Coca-Cola Co. and IBM. The U.S. companies say if the state gives the foreign companies a “water’s edge” break, then it should not tax the income that U.S. companies receive from their foreign subsidiaries.

Millions at Stake

The differences are so great that estimates by the Franchise Tax Board are that the limited bill would provide a tax break in the range of $200 million to $250 million while full repeal could be twice that amount.

With those stakes, the competing interests appear to have pulled out all stops.

Each week, it seems new lobbyists enter the fight. At least six major lobbying firms are involved, and five powerful corporate coalitions have been put together.

A group of 90 U.S. companies, including IBM, Hewlett-Packard, Exxon and others, have joined forces under the name of the California Business Council.

Their lobbyists include Michael Franchetti, a former state finance director and close political associate of the governor who frankly admits he was hired because of his relationship with Deukmejian.

Another lobbyist is Dennis C. Revell, married to Maureen Reagan, the President’s daughter. Revell now is working in Sacramento, a hired gun who started out lobbying for the Japanese then switched last year when he left a Los Angeles political firm to start his own.

The Business Council puts out slick brochures, numerous press releases and organizes meetings involving some of California’s most powerful corporate leaders. Several months ago, 17 to 20 of them got together and each pledged $25,000 to the unitary fight. In 1984, the council reported spending $119,000 in its effort to influence legislators, and currently they are ahead of that pace, spending $89,000 during the first three months of the year. The money went to three lobbyists.

One of the most active groups representing foreign interests is the California Unitary Coalition, supported principally by Japanese corporations, including firms such as Sony and Kyocera International Inc., which produces ceramic products for the microelectronics industry.

Former Roberti Aide

Jerry Zanelli, formerly a top aide to Senate President Pro Tem David A. Roberti, is the chief lobbyist for this group. Richard T. Silberman, former finance director under ex-Gov. Edmund G. Brown Jr., helped organize the group. Last year, the Unitary Coalition made $101,467 in campaign contributions to members of the Senate and Assembly. So far this year, another $27,500 has been given. On top of that, the committee paid $86,000 directly to Zanelli.

A related committee, supported by most of the same companies, is the California Investment Environment Committee, which reported spending $230,000 on the unitary bill during the last six months of 1984. Zanelli also represents this group, along with former Rep. Clair Burgener and former Assemblyman Bruce Young.

Individual companies, like Sony and Shell, also are operating on their own. Sony made $68,175 in direct contributions to senators and assemblymen, in addition to the $32,500 it contributed to the California Unitary Coalition.

Shell, which has been lobbying on unitary tax and several other issues, has made about $220,000 in campaign contributions since 1983. The company also has paid $131,000 to three lobbyists, including longtime Shell advocate Everett McCracken. McCracken said unitary was one of the top issues on Shell’s legislative agenda.

Along with contributions, the corporate interests have spent substantial amounts on travel and entertainment expenses for both legislators and their staffs.

One key legislator, Sen. Daniel E. Boatwright (D-Concord), chairman of the Senate Revenue and Taxation Committee, has gone on trips to Japan and Europe sponsored by foreign business interests hoping to repeal the unitary tax.

His latest trip, to Japan, was made last November. Boatwright received $7,460 in expenses from the Japan Institute for Social and Economic Affairs, associated with the Keidanren, a federation of major Japanese corporations.

Quick Approval

Boatwright figured in a controversial unitary episode last April when his committee gave quick approval to the Alquist unitary measure after only a brief hearing and no debate. Just hours after the hearing, Boatwright hosted a $500-a-person fund-raising dinner at a local restaurant, and a number of the unitary lobbyists showed up.

“(Boatwright) did say we could testify if we wanted, but he said this was a preliminary bill and anyone who testified would not be able to testify later when the bill came back for another hearing. A lot of people who anticipated testifying at that time did not,” said one lobbyist who asked not to be identified.

Boatwright refused to answer questions about either the trip or the hearing.

Sony Corp., among all the corporations, has been especially active. A Sony vice president, Sadami (Chris) Wada, is something of a ubiquitous presence in the Capitol. He even tracked down Assemblyman Thomas M. Hannigan (D-Fairfield), chairman of the Assembly Revenue and Taxation Committee, in Tokyo last November.

Hannigan said he was on a Japan Airlines flight en route to Peking when he received a message that Wada had been looking for him in Tokyo, hoping to take him to dinner. “He is like a heat-seeking missile,” Hannigan said.

When Sony was a vote short during one crucial hearing last year, the company chartered a private jet and flew Assemblyman Pat Nolan (R-Glendale), now GOP leader in the lower house, from San Diego to a Ways and Means Committee hearing in Sacramento.

Another time, when Senate Rules Committee executive officer Cliff Berg, a close aide to Roberti, was traveling through New York, Wada arranged to take him to dinner and the theater. Sony provided Roberti himself with a limousine when he needed transportation during another trip to New York.

Has Work Permit

The Tokyo-born Wada, based in New York, has lived in the United States for 24 years but is still a Japanese citizen who uses a green card work permit. He is considered by those who know him to be bright, charming and honest. When it comes to politics, he is clearly aggressive.

Wada, 52, has not registered as a lobbyist because he is a Sony executive and lobbying is not considered his principal occupation. This allows him privileges not given to other lobbyists, such as access to the floor of the Assembly, where he was seen several weeks ago during a unitary vote with a roll call of legislators, the names of several of those opposing the bill or not voting circled or underlined.

He is so active that many believe he should in fact be registered, which would force him under state law to adhere to regulations governing other lobbyists, such as meeting a limit of $10 a month to entertain legislators. “He definitely should be registered. He’s as active as anyone,” said Steve Barrow, a lobbyist for the public interest group Common Cause.

Wada said he has gone over state law with his lawyer and he was told that legally he does not have to register.

Wada also said there was no connection between Sony’s campaign contributions and votes by individual legislators on unitary issues.

Entry Into Politics

He said Sony first began supporting legislators in California communities where Sony had plants--San Diego, Compton, Palo Alto and Brisbane--by buying tickets to fund-raising dinners, then gradually expanded its list of political friends. “Once you accept invitations from some of them, you get more from other legislators,” he said. The invitations carry price tags, such as Boatwright’s $500-a-person dinner, but Wada said he doesn’t mind.

He said he respects the integrity of legislators. “I think legislators will make a decision, whether they are paid $1 million or nothing, on what they believe is right,” he said.

Lobbyist Barrow, who has been tracking the unitary issue for Common Cause, has another view. “I think if the companies spend $1 million or even $2 million on a public relations campaign, campaign contributions and hiring the right lobbyists and then get a $500-million tax break they will consider their money well spent,” he said.