Panel OKs Bill to Let Foreign Firms Escape Unitary Tax

A bill that would give multinational corporations an estimated $258-million tax break by allowing them to escape the state’s controversial unitary method of taxation was approved by the Assembly Revenue and Taxation Committee on Monday in a critical test of the controversial legislation.

Approval came on a strong 9-4 bipartisan vote, leading the bill’s author, Sen. Alfred E. Alquist (D-San Jose), to predict that the legislation will pass the Assembly and Senate and be on Gov. George Deukmejian’s desk by the end of the month.

“I am reasonably sure this bill will become law,” said Alquist, who successfully fought off opposition during the committee hearing by a number of the state’s leading domestic corporations.

The unitary method bases a firm’s tax on its worldwide income and profits, rather than only those profits generated within the United States. The Alquist bill would allow companies the option of either staying with the present system or choosing to be taxed only on their U.S. profits.

For years, legislation to repeal or modify the unitary method of taxation has failed in the Legislature. Proponents of repeal contend that the unitary system is unfair and has discouraged new investment and business expansion.

U.S. firms have been bitterly fighting the bill on the grounds that the legislation would give a disproportionate share of the tax cut benefits to foreign corporations, such as Sony Corp. of Japan, which has been leading the effort to enact the Alquist bill.

That claim was rebutted in a report prepared by the staff of the tax-writing committee, which said that domestic corporations--and not foreign corporations--would receive most of the tax break benefits.

The tax-writing committee was told that the bill would cut state corporate taxes paid by multinational corporations by $258 million, with domestic companies in line to receive about $200 million of the cut. The staff said there would be “no losers” among the large corporations.

Conceding the concerns, Alquist amended the bill before the committee vote in a manner designed to give U.S. companies an additional $7 million in tax credits.

Despite the amendment, corporate officials of numerous major U.S. firms, such as Coca-Cola Co., Litton Industries, U.S. Steel Corp. and TRW Inc., lined up to testify in opposition to the bill.

Robert Wayman, chief executive officer and vice president of Hewlett-Packard Co., said the bill was so weighted to foreign corporations that it “places an additional burden on the backs of American business at a time when it is fighting for its life against foreign competition.”

However, neither Wayman nor other opponents of the Alquist bill could refute the findings of the staff analysis.

“I don’t think they have proved their case. I think they want more of a tax break than this bill gives them,” Alquist said.

Committee members who supported the bill said they were persuaded by assertions that the unitary tax is so unpopular among foreign corporations that it was impeding investment in California.

Assemblyman Gray Davis (D-Los Angeles) said that there were no guarantees that foreign firms would increase investments in California if the tax is changed, but argued “the greater risk is to do nothing.”

A leading opponent in the lower house, Assemblyman Robert W. Naylor (R-Menlo Park), agreed with Alquist’s prediction, saying the bill appeared as though it had enough momentum “to probably pass the Legislature.”

The governor has not yet endorsed the bill but an Administration official said the Alquist bill was very close to the kind of bill the governor wants.

The Senate-approved legislation now moves for a vote by the Assembly Ways and Means Committee.