Bill to Revise Unitary Tax Takes Nearly Final Shape

Legislation aimed at ending the decades-old fight over the state’s method of taxing multinational corporations took nearly final shape Monday after negotiators backed away from a stiff assessment fee they had proposed as the price that foreign and domestic corporations would have to pay for tax relief.

One of four amendments adopted by a Senate-Assembly conference committee would reduce by half the penalty--a so-called “election fee”--that would be charged to corporations that choose to get out from under the current unitary system.

After the amendments were adopted on a series of lopsided votes, Sen. Alfred E. Alquist (D-San Jose), chairman of the six-member committee, said the tax-writing panel would take a final vote on the complex bill Wednesday.

Once the bill is approved by the committee it must be voted on by the full Senate and Assembly.

The committee is undertaking the first major legislative revision of the unitary system in 50 years, and members of the panel think they are close to agreement.

Prior to the votes on the amendments, Sen. Wadie L. Deddeh (D-Chula Vista), a member of the committee, said, “I have never seen the Assembly and Senate as close to resolution of the issue as we are today.”

Under the unitary method, state tax is based a corporation’s stake in California balanced against its worldwide profits. For example, if 10% of a firm’s property, payroll and receipts are in California, then the state applies its bank and corporation tax against 10% of its worldwide income.

‘Water’s Edge’ Approach

Foreign and domestic corporations claim that the system is unfair and have been pressuring for changes that would limit the state’s tax reach to business operations in the United States, the so-called “water’s edge” approach.

Under the proposed bill, foreign and domestic corporations would choose between being taxed on the basis of worldwide income or the narrower “water’s edge” approach. But if they choose the more limited method, they would have to pay the so-called election fee.

The reduced fee would cost the state millions in lost revenues, but committee members believe it is a necessary compromise.

A compromise version of the bill proposed last week would have raised $75 million in revenues by assessing a fee of 0.06% of the value of a corporation’s receipts, property and payroll in California. The amendment, approved on a 5-1 vote, would reduce that fee to 0.03%.

The “no” vote was cast by Assemblyman Dennis Brown (R-Signal Hill), who said he remained opposed to any fee at all, but certainly none higher than the 0.02% that is being sought by Gov. George Deukmejian.

After the vote, Nancy Ordway, a Deukmejian Administration official who has been representing the governor during the tax negotiations, said the proposed fee adopted by the committee “is within the range for us.”

Multinationals Complain

Lobbyists for various corporate interests claim even that fee is unfair because the state in effect will be putting money in one pocket but taking it out of another.

“They have been beating us over the head with what we consider to be an unfair system of taxation and now they want to charge us a fee for ending it,” said Richard E. Ratcliff, the lobbyist for a group of domestic corporations owned by foreign multinationals that calls itself the Organization for Fair Taxation of International Investments.