Legislature Passes Bill to Revise Unitary Tax : Measure Providing $83 Million in Relief for Multinational Corporations Sent to Governor

Shedding themselves of a longstanding and at times seemingly insurmountable political problem, the Senate and Assembly on Tuesday voted final legislative passage to a bill revising California’s 50-year-old method of taxing multinational corporations.

The legislation was sent to Gov. George Deukmejian, who is expected to sign it.

In bipartisan votes climaxing the long, well-financed lobbying war waged by foreign and domestic corporations over how the tax-relief pie would be divided, the Senate passed the unitary tax bill 27 to 7, followed soon after by the Assembly, on an even stronger 65-11 vote.

The legislation developed from a compromise worked out by a two-house conference committee last week. It would give international corporations an estimated $83 million in tax relief. Critics contend that the price tag is too high, but supporters say it is substantially less than the $600 million-plus called for in earlier versions of the bill.

“It balances the discontent of all the interested parties,” said Sen. Alfred E. Alquist (D-San Jose), the bill’s author, explaining how the conference committee offset the conflict between foreign and domestic corporations.

Deukmejian has not taken an official position on the bill. But the Republican governor has made revision of the unitary tax system a top priority, arguing that the state’s present system of taxing global corporations is so costly to the multinational firms that it discouragessome companies from making new investments here.

“The governor is happy with it. We minimized the revenue loss to the state and we balanced it so that everyone is treated fairly,” said Senate Republican Leader James W. Nielsen of Woodland, indicating that the governor gave GOP lawmakers the green light to vote for the legislation.

Reacting quickly to passage of the legislation, Akio Morita, vice chairman of a Japanese business federation known as Keidanren and the chief executive officer of Sony Corp., said, “We expect that investment in California by Japan and other countries will be accelerated.”

Under the unitary system, the state levies its 9.6% bank and corporation tax against the worldwide profits produced by a company’s various subsidiaries, rather than just the income produced in California or the United States. If 10% of a company’s sales, payroll and property are in California, then the state taxes 10% of the firm’s entire profits, even if its California subsidiaries are losing money.

The unitary method was originally devised in the 1930s to keep motion picture companies and other corporate entities from shifting profits out of California to foreign dummy corporations in order to escape state taxes.

A Constant Irritant

But multinational corporations argue that new plants often are not profitable for the first few years of their operation and thus should not be taxed no matter how rich the parent company is. They also say the unitary system is a constant irritant because only California and a handful of other states use it, causing complicated and duplicative bookkeeping.

For at least 10 years, unitary tax bills have been kicking around the Legislature, some dying in committee, others approved by one house but defeated in the other. Unitary tax measures have died in the closing hours of the last two legislative sessions.

“I thought I would never see this day,” Assemblywoman Teresa P. Hughes (D-Los Angeles), who authored several of the earlier unitary bills, declared in the debate in the Assembly.

One key legislative aide, who like many other staff members has drafted and then torn up dozens of different bills, said of the legislation’s price tag: “It’s worth $83 million to get this off our backs.”

The key to easy passage of the bill was a complex compromise that satisfied representatives of both foreign and domestic corporations. Companies with a big financial stake in the unitary bill, such as Sony Corp., the large Japanese electronics manufacturer, have made hundreds of thousands of dollars in campaign contributions to lawmakers.

Under the bill, foreign-based corporations would be allowed to get out from under the present system and have their taxes based, beginning with the 1988 tax year, only on profits generated by subsidiaries operating in the United States.

Would Pay ‘Election Fee’

If they chose this option--and about two-thirds of the multinationals would be expected to--companies would have to pay a so-called “election fee,” amounting to 0.03% of the value of their property, sales and payroll in California.

This penalty would be levied on an annual basis, raising an estimated $38 million the first year. The money would be earmarked for expenditures on public works projects designed to foster economic development, such as highway projects tied to new plants.

The fee would be reduced on a dollar-for-dollar basis by any new business expansion in the state, a feature designed to encourage new investment in California.

Domestic corporations had opposed earlier versions of the bill on the grounds that they were so tilted toward foreign multinationals that home-state companies would be put at a competitive disadvantage. Under the bill, these companies would be allowed to shelter from state taxes up to 75% of the profits generated by their own foreign subsidiaries.

Critics of the legislation claim that the bill gives unnecessary tax relief to the world’s largest corporations at a time when severe budget cuts are being made in other state programs.

“This is nothing more than welfare for corporations,” said Assemblyman Jack O’Connell (D-Carpinteria), before he voted against the bill.

Assemblyman Tom Hayden (D-Santa Monica) argued that despite claims that the unitary tax system was discouraging corporate investment in California, the state has consistently led the nation in job creation and business expansion. He said proponents of the legislation espoused “voodoo economics.”