Taxing in the Dark

The California Legislature is putting the final touches on a tax-reform bill that may well be the finest that money can buy.

The bill would modify a so-called unitary tax on multinational corporations. California is the last major state that imposes such a tax. Whether repeal would help California grow or simply mean higher taxes for the average Californian or smaller budgets for worthy state programs is at best a matter of conjecture and at worst of blind faith. Detailed arithmetic that might help evaluate the bill is proprietary, hidden from citizens and legislators alike.

All that outsiders know for a fact is that the bill is nipping along in the direction preferred by mostly foreign companies that have poured tens of thousands of dollars in campaign contributions into Sacramento, and that some American companies meeting payrolls for about 250,000 residents of the state say the reform would hurt them more than it would help anyone else.

With so many more questions than answers, the affair has the distinct aroma of a job better left undone than done haphazardly. The bill has moved through the Senate and through one Assembly committee on its way to passage with little long-range analysis of its effect on California’s economy, prodded along in an atmosphere of polite threats that failure to act would cut California out of the expansion plans of such international giants as IBM and Sony. It has gone as far as it should without more straight talk and public arithmetic.

California’s unitary-tax law requires multinational corporations to report earnings and holdings worldwide, and applies the tax to the percentage of the total that involves sales, property and payrolls in California. If California activities represent half the global total, the tax is imposed on half the company’s worldwide assets.

The tax formula was conceived to prevent corporations with operations in other states and nations from keeping their books in ways that would shift profits actually earned in California to regions where tax rates were lower.

What is going on in Sacramento is no neighborhood poker game. According to some estimates, outright repeal of the unitary tax would cost state government upwards of $500 million in the first year, and tens of millions of dollars on top of that in later years. Some estimates are half that high.

A bill sponsored by Sen. Alfred E. Alquist (D-San Jose) would allow foreign-based firms with operations in California to to pay taxes based only on assets here and in the other 49 states--the “water’s edge” formula. Domestic corporations could omit their foreign operations from the tax base, but would pay the tax on dividends based on foreign earnings.

About 90 American companies are crying foul, the most vocal being high-technology firms in direct competition with Japanese companies. They argue that taxing dividends would add to their costs but not to Japanese costs, and would put them at a disadvantage.

One California economist, who studied the unitary tax in behalf of a coalition of major American companies, said recently that repeal should lead to an increase of about $3 billion a year in investments of all kinds in California.

But Larry Kimbell of UCLA also indicated that it is not a matter of life and death for the economy. “I believe California’s prospects are good even if we continue with the present system,” he said.

No state has abolished the tax voluntarily. All have been pushed by corporations and by the federal government, which apparently is tired of hearing foreign governments complain that the tax is unfair and of having the unitary tax muddle its trade negotiations.

If repeal of the unitary tax would make it possible for California to lure high-technology investments and keep what it has, the state should not have to be dragged screaming into the last few years of the 20th Century. But the law should not be changed just to make life easier for the State Department. Nor should it be changed behind the backs of people who will either have to make up revenue losses or do without programs that would be crimped by a loss of $300 million or $500 million in revenue. Above all, it should not be changed by legislators who show every sign of being baffled by the evidence and for many of whom the only clue to the right thing to do seems to be large political contributions.