Deukmejian Chides Reagan, Signs Bill Changing Unitary Tax System

Gov. George Deukmejian mildly criticized the Reagan Administration for its foreign trade policy Friday, then signed historic legislation overhauling the state’s system of taxing international corporations.

Deukmejian, in signing the bill revising the so-called unitary tax system, predicted that it will stimulate the state’s economy by removing a major obstacle to foreign investment in California.

Foreign firms have long claimed that the unitary method is unfair because the state uses it to tax a corporation’s worldwide profits, rather than just the profits generated within California or the United States.

Deukmejian’s subtle criticism of the Reagan Administration came during a breakfast speech to about 1,000 business leaders. The governor indicated that while he hopes to make California a more attractive place for foreign investment, he believes that Washington should do more to open up foreign markets to California exports.

“We must continue our vigorous advocacy of lower trade barriers,” Deukmejian told business leaders attending the 60th annual Sacramento Host Breakfast, held each year at the time of the State Fair. “We believe in free trade. We insist upon fair trade. To paraphrase one U.S. senator: When it comes to trade, we can’t afford to talk like Rambo--but act like Bambi.”

Avoids Direct Reply

The U.S. senator that the Republican governor paraphrased was Democrat John H. Glenn of Ohio, a frequent critic of President Reagan’s trade policies. The Rambo line came from a news conference last month in which Glenn and other Democratic senators denounced Senate Republicans and the President for opposing a series of foreign trade bills that the Reagan Administration felt were too protectionist, a Glenn aide said.

Deukmejian, asked by a reporter after the speech whether his Rambo comment was a reference to Reagan, avoided a direct answer but said: “I’m just suggesting in general that we cannot simply deplore (foreign trade barriers) and not take action to back it up.”

Deukmejian also told the business executives that he plans to “contact President Reagan on behalf of California’s high-technology manufacturers to seek (the President’s) action on a serious problem: Unreasonable bureaucratic delays in obtaining export licenses.”

The governor added that “many sales are now forfeited because of these delays. We need a more streamlined process, consistent with U.S. national security.”

Gregory Mignano, executive director of the state World Trade Commission, said the policy of the Reagan Administration is to strike a balance between expanding U.S. exports and the need to protect national security by stemming the flow of technology that might have military implications for other nations.

‘Massive Bureaucracy’

“The delay in issuing export licenses is viewed by our high-technology exporters as the single biggest problem in their ability to be competitive with foreign business,” Mignano said. “The business community is sensitive to national security needs, but the law is administered by a massive bureaucracy. By the time a company clears the bureaucracy, it’s often lost the sale to a foreign competitor because of the intensely competitive nature of the business.”

Deukmejian’s speech marked the second time in recent weeks that he has steered a course independent of Reagan. Usually, he is a staunch ally of the President.

The first split came over the South Africa divestiture issue, when the governor gave his support to a bill requiring the sale of $11.4 billion worth of state pension fund investments in companies that do business in the racially troubled nation. Deukmejian joined a number of other political leaders in chiding Reagan for refusing to impose economic sanctions against the white-minority government.

In signing the unitary legislation, which will give foreign and domestic multinational firms $83 million in tax relief, Deukmejian said enactment of the new tax system “very definitely is going to help encourage additional investments in our state, and along with it the creation of many thousands of additional jobs.”

Joining Deukmejian at the bill-signing ceremony in the governor’s office were legislators who hammered out the compromise bill during months of negotiation.

The governor said the unitary tax legislation showed that California is willing to do its share to reduce barriers to international trade, but he added that pressure must be put on Japan and other Pacific Rim nations to open their markets to California exports.

Repeals 50-Year-Old System

The heavily lobbied unitary legislation in effect repeals the 50-year-old tax system by giving foreign and domestic multinational corporations the choice of paying their bank and corporation taxes under a different method if it will save them money.

Under the decades-old system, a corporation was taxed on the worldwide profits of its parent corporation and all its subsidiaries. It works this way: If 10% of a corporation’s payroll, property and receipts came from California, then the state applied its 9.6% bank and corporation tax on 10% of the firm’s global income.

The repeal legislation, authored by Sen. Alfred E. Alquist (D-San Jose), gives companies the option of electing to pay their taxes under the old system or, if they choose, a more limited method based solely on profits generated within the United States. About two-thirds of the multinationals are expected to opt out of the present system when the legislation takes effect during the 1988 tax year.

If companies elect to get out, they will have to pay a so-called “election fee”--0.03% of the value of the firm’s payroll, property and receipts in California. Money generated by the fee will be used to finance public works projects. For every $1 of new investment that companies make in California, they will be able to reduce their fee obligation by $1, a feature designed to provide an incentive to new investment.