Governor Warns Japanese on Investment, Freer Trade

In a warning to Japan, Gov. George Deukmejian raised the possibility today of California’s returning to the unitary method of taxing multinational firms if the Japanese do not significantly increase their investments in the state and open their markets more to imports.

“There’s nothing to stop us from doing that,” he asserted.

Reacting to pressure from foreigners, particularly the Japanese, Deukmejian and several key legislators pushed hard for revision of the unitary taxing system during his first term as governor. The Legislature last year passed a compromise bill that was signed by the governor.

Under the old unitary system--enacted half a century ago to keep companies, especially movie studios, from hiding their profits outside the state--California levied taxes on multinational firms based on their worldwide profits. Under the new “water’s edge” system, to be fully implemented next year, firms can pay a fee--called an “election fee”--and have their taxes based on U.S. profits.

During his weeklong trade and investment mission to Japan, Deukmejian has offered a carrot-and-stick approach to the Japanese concerning the unitary taxing system.

The carrot--potential elimination of the “election fee”--was offered Wednesday at a press conference in Tokyo with the Foreign Correspondents Club. The governor recalled that the Japanese had aggressively fought for overhaul of the unitary system, but still objected to the “election fee.” And he said:

“If we now see a good-faith effort on the part of the Japanese for greater investment in California, as was indicated at the time when we were considering modifying the unitary method of taxation . . . if we see greater opportunity at opening up markets here in Japan for California products, then I think the California Legislature would be willing to revisit the issue of the election fee.”

Deukmejian’s stick in this potential political squeeze play was shown unexpectedly today--surprising even his own staff--during a breakfast session with California reporters accompanying him.

Asked if he could foresee changing his “free trade” position and supporting economic sanctions against the Japanese, Deukmejian replied quickly: “Sure--if we didn’t see considerable progress.”

Then he volunteered: “There’s no reason why, for example, we can’t go back to the unitary method of taxation. There’s nothing to stop us from doing that.”

Asked under what circumstances he would advocate returning to the unitary system, the governor replied: “If I saw there wasn’t a serious effort being undertaken by the Japanese government, the Japanese business leaders, to give us equal access to the market in Japan.

“All we’re asking for is equality. We give them the opportunity to export their products. All we’re asking for is the same thing in return.”

Noting that the Japanese trade surplus with the United States has grown from roughly $2 billion to nearly $60 billion in the last 15 years, the governor said: “I think that American people’s patience is beginning to run out.”

He said, referring to the unitary system:

“I mean, (in) the states, we don’t have the jurisdiction over a lot of these international questions of trade and the like, but there are some things we can do. And this is an option. We’re going to try to be as influential as we can.”

Later, Deukmejian press secretary Larry Thomas said that the governor “worked very hard to get the unitary system modified. And it’s his view that we took the most significant step that was requested of us by the Japanese to spur investment.

“The unitary was consistently thrown up in our faces as an impediment to investment. Now, he just wants them to know what the situation is and what the stakes are.”

When Deukmejian signed the unitary overhaul legislation, it was estimated that multinational firms electing to take advantage of it would be getting a total of $83 million in tax relief.