Senate OKs Fee to Replace State Unitary Tax Method

A far-reaching change in California’s method of taxing multinational corporations was approved by a 27-7 state Senate vote today, leaving it just one step from the governor’s desk.

The Assembly was expected to act on the proposal later in the day and send it on to Gov. George Deukmejian.

“It balances the discontent of all the interested parties,” said Sen. Alfred Alquist (D-San Jose), author of the long-stalled bill and chairman of the Senate Budget and Fiscal Review Committee. “No one gave too much and no one gave too little.”

Under the bill, companies could escape the unitary method, which bases their corporate tax on their worldwide income, by paying a special fee for 10 years.

Currently, the state taxes multinational corporations on the California percentage of such worldwide assets as property, payroll and sales.

‘Stampeded’ by Threats

The practice has been opposed for several years by companies that object to being taxed for income they earn outside the state. Opponents of the unitary method in the Legislature, federal government and foreign capitals also have contended that the unitary method discourages foreign investment in California.

The only senator to speak against the bill in floor debate, Sen. Nicholas Petris (D-Oakland), complained that the Legislature was being “stampeded” by empty threats that multinational corporations would pull out of California’s lucrative market.

“We ought to leave it as it is,” Petris said in opposition to the bill. “We have the marketplace here and we will keep them here.”

Alquist countered that California’s trade partners, notably Japan and Great Britain, have threatened retaliatory action unless something is done to ease their tax burdens.

The bill is expected to cost the state about $83 million in lost income the first year. It would take effect in 1988 if passed by the Assembly and signed by Deukmejian, who has supported changing the tax practice.

The fee paid by companies that choose not to be taxed under the unitary method would raise about $38 million, according to analysts’ estimates.

That amount would replace some of the tax loss, although the bill stipulates that it be spent on sewers, roads and other industrial needs and not be put into the state’s general fund.