Panel Close to Agreement on Unitary Tax Compromise

Legislative tax writers said Thursday they were close to agreement on a bill that could end the high-stakes battle over proposed revisions in the state’s unitary system of taxing multinational corporations.

“I think we’re as close as we’ve ever been,” said Senate Republican Leader James W. Nielsen of Woodland, a member of a two-house conference committee negotiating a unitary tax bill.

Behind the optimism is a proposed compromise that lawmakers say would give essentially equal tax treatment to both foreign and domestic corporations, the two powerful interest groups that have battled for three years over the shape of the bill.

“Everybody gets a lot, nobody gets everything,” said Assemblyman John Vasconcellos (D-Santa Clara), who helped fashion the compromise.

The six-member conference committee late Wednesday ordered a sketchy outline of the complex plan drafted into a bill that is set for a hearing on Monday.

Under the long-debated unitary tax system, the state applies the bank and corporation tax to a share of a corporation’s worldwide earnings, based on the amount of business it does in California. Thus, if a company has 10% of its sales, property and payroll in California, the state applies the bank and corporation tax to 10% of its worldwide earnings.

The system was set up in the 1930s to keep multinational corporations from avoiding state taxes by using accounting tricks to shift profits from California to corporate entities overseas.

But corporations claim that the unitary system is unfair because they can be forced to pay a state tax even on money-losing ventures. Most frequently cited are start-up costs associated with new plants, which often are not profitable for several years. Opponents also say the unitary system creates an administrative headache, requiring the keeping of two sets of books, because California is only one of a handful of states using the system.

Stimulate State Economy

Foreign business and political leaders claim that the unitary system is discouraging them from making new corporate investments in California.

Gov. George Deukmejian has made overhaul of the unitary system a top priority, believing that it would help California attract new business and stimulate the state’s economy. Conference committee members pointed out that the proposed compromise incorporates key elements of a unitary revision plan once pushed by the governor. But Administration officials took no immediate position on the committee concept, saying it still was under review.

The compromise plan marries elements of rival unitary bills sponsored by Vasconcellos and Sen. Alfred E. Alquist (D-San Jose).

Alquist said problems remain to be worked out, but declared, “I’m reasonably certain we’ll have a bill we can agree on by next week.”

Plan Offers Option

Under the proposal, corporations would have the option of basing their state tax on either the current worldwide unitary system or on the more limited basis of earnings within the United States or its possessions, the so-called “water’s edge” approach.

However, there would be a penalty--called an “election fee”--for many corporations that chose the “water’s edge” approach. These would include so-called 80/20 multinational corporations that are based in the United States but have 80% or more of their operations elsewhere. Another category of multinationals that would have to pay the “election fee” are firms with subsidiaries in U.S. possessions such as Guam and Puerto Rico.

The election fee would amount to 0.06% of the value of a company’s property, sales and payroll in California.

Earlier proposals would have given as much as $800 million in tax relief per year to foreign-based and domestic corporations. The compromise, depending on a complex series of variables, could lower that amount to about $51 million.

Effect on Revenues

An analysis by the conference committee staff estimated that the bill, if it took effect in 1988, would cost the state $237 million in lost revenues. But the analysis said $110 million of that would be returned to the state Treasury if Congress enacted corporate tax law changes that it is considering. The analysis said the election fees would raise about $75 million. That money would be earmarked for state and local construction projects.

Alquist said the legislative committee was feeling pressure to act from Congress. A subcommittee of the U.S. Senate has scheduled a hearing Sept. 29 on federal legislation to repeal the unitary system in California and the handful of other states that still use it.

“I think it’s essential that we pass some form of unitary relief or we are going to have Congress preempt the field completely and we are going to find ourselves with a $600-million revenue loss rather than something we can handle a bit more easily,” he said.

Domestic corporations had opposed earlier bills because they said the proposals were aimed primarily at providing foreign corporations with tax relief. Under the new plan, domestic-based multinational corporations would get much of what they want--freedom from state taxes on profits they bring into California from their own foreign subsidiaries. The domestic firms had wanted 100% relief, but the proposal would give them 75%.

Extensive Lobbying

Both foreign and domestic corporations have conducted extensive lobbying campaigns during the last three years. Cocktail parties have been thrown for legislators, companies have contributed hundreds of thousands of dollars to legislators’ reelection campaigns, and dozens of lobbyists hired by various corporate interests show up regularly for unitary hearings.

“Every time you change a word or phrase in the bill it means some industry is going to be helped or hurt,” said Barbara Cavalier, a lobbyist for the California Manufacturers Assn. who has followed the legislation for several years and watched the bill evolve through various forms.

Lobbyists generally were reluctant to comment Thursday until their clients had a chance to assess the effect of the proposed legislation on their individual companies, but several said it appeared that the authors of the plan had reduced prospective tax benefits on all sides.

Ralph Simoni, a lobbyist for Coca-Cola Co., said, “I think it punishes everybody equally.”

‘Everyone Is Optimistic’

George Steffes, who represents several major corporations, said, “We still have some problems, but I think everyone is optimistic that something can be worked out.”

Last year, unitary legislation was stymied by an amendment that would have denied tax benefits to companies with business operations in South Africa. The provision was part of the legislative fight to pass anti-apartheid measures aimed at putting pressure on the South African government to end its policy of racial separation.

But the sticky question of South Africa race relations was removed from the unitary debate on Tuesday when Deukmejian and two key Democratic legislators--Assembly Speaker Willie Brown of San Francisco and Assemblywoman Maxine Waters of Los Angeles--reached agreement on a bill that would require the University of California and the state’s large pension funds to divest their holdings of securities in companies doing business in South Africa.

“It clearly takes the major obstacle out of the way,” Assemblyman Thomas M. Hannigan (D-Fairfield) said of the agreement on South Africa.