Repeal of Unitary Tax in Limbo as Legislative Compromise Fails

Attempts to negotiate a compromise on heavily lobbied unitary-tax repeal legislation failed Tuesday, leaving the $258-million tax-break proposal for multinational corporations hanging in legislative limbo.

The development came when the Assembly Ways and Means Committee battled to a standoff and Republican supporters moved to adjourn the hearing, rather than call a vote on the bill.

Assemblyman William P. Baker (R-Danville), the committee vice chairman and its ranking GOP member, made the motion to adjourn.

“We couldn’t predict what the vote would be so we didn’t move it,” he said.

Baker suggested the stalemate was tied to hundreds of thousands of dollars in campaign contributions that legislators from both parties are receiving from corporations that stand to save millions in state taxes.

“Will the cow be around next year for milking? Tune in tomorrow,” he told reporters after the hearing.

Efforts to repeal the unitary tax have been under way for seven years. Multinational corporations believe the tax is unfair because, as it now stands, it requires a company to file tax returns on the basis of worldwide income of its subsidiaries.

Under the bill by Sen. Alfred E. Alquist (D-San Jose), corporations would be able to choose between the existing worldwide accounting method, or a more limited formula based on business conducted within the United States.

The Franchise Tax Board estimates that the bill would cost the state $258 million in lost tax revenues during its first full year of implementation.

The fight, as well as the intense lobbying effort, developed between domestic corporations and those based in foreign countries. U.S. corporations claim the legislation is tilted to benefit foreign-based firms and would put them at a competitive disadvantage.

Both opponents and proponents considered Tuesday’s hearing important and intensely lobbied all 23 committee members.

The failure to vote will make it even tougher on the bill’s supporters, who want to get the measure through the Legislature before both houses adjourn Sept. 13.

Since Tuesday represented the deadline for moving the bill out of the committee without an extraordinary rules waiver, Alquist and other supporters must develop a new strategy to get the measure to the Assembly floor. Such a waiver requires a two-thirds vote.

One possibility is that the bill would be amended into another now in conference committee, a tactic that has been used in the past. Baker raised that possibility, saying proponents of unitary-tax repeal were not giving up.

“This bill is still very much alive,” he said.

Efforts to breathe life into the bill failed after Republicans rejected a compromise by Assemblyman John Vasconcellos (D-San Jose), committee chairman. He put together a proposal that had the support of domestic corporations, but which would have more than doubled the cost of the bill.

The Franchise Tax Board estimated that the cost, after the bill’s third year, would be a loss to the state treasury of $675 million. Vasconcellos countered by saying the bill would provide such an incentive to industry to locate in California that revenues generated by business expansion would cover much of the tax loss.

Republicans also opposed an anti-apartheid amendment tacked onto the bill by Assemblywoman Maxine Waters (D-Los Angeles). It would have made the tax relief conditional on promises by the corporate beneficiaries that they would make no new investments in South Africa because of that nation’s policy of racial discrimination.