Despite Deficit, New Tax Breaks Are in the Works

While state government is staggering under $12.6 billion in red ink, legislators have introduced dozens of bills this year to provide tax breaks for special interests--ranging from a Los Angeles-based solar energy company to a Brussels sprouts grower on the Northern California coast.

Some of the legislation is intended to give relief to broad groups--homeowners, parents of young children, and companies that are losing money during the recession. Other bills are more narrowly crafted, helping individuals and companies that want to cut their property taxes or object to paying the sales tax.

At a time when Gov. Pete Wilson is huddling with legislative leaders, desperately looking for the most politically palatable way to cut government programs and raise taxes, these bills would turn money away:

* One would give as much as $6.4 million annually in property tax breaks to Luz International, a company that is planning to build four, large-scale solar energy plants in San Bernardino County.

* Another would solve a $6,800 tax dispute that a Brussels sprouts grower is having with his local assessor, who has been taxing the land as if it were planted with a more profitable crop of strawberries.

* Another allows corporations to deduct current losses in future tax years--a practice that can cost the state treasury as much as $600 million a year.

There are a host of such bills. In every case the backers argue that there are sound reasons to create or continue the favorable tax treatments. Some affect thousands, even millions of taxpayers. Homeowners would get an increase in their property tax exemptions under a state constitutional amendment proposed by Assemblyman Dave Elder (D-San Pedro).

Parents who stay home to take care of young children would get an expanded tax break from a bill offered by Sen. Don Rogers (R-Bakersfield).

Other bills are intended to deal with the special problems of a small group of people or even a single business.

Assemblyman Tom Bane (D-Tarzana) has a bill to exempt silver medals from sales taxes.

Ostriches would be treated as livestock for the purpose of lower taxes under a bill by Assemblyman Trice Harvey (R-Bakersfield).

A local charity in Thousand Oaks would be able to get a tax break on property it rents to government agencies under a measure by Assemblyman Tom McClintock (R-Thousand Oaks).

Assemblyman Johan Klehs (D-Castro Valley), who chairs the Revenue and Taxation Committee, is promising tougher scrutiny of the special-interest bills in this year of state and local government budget crisis.

“We’ve given away $200 billion in tax dollars during the last 10 years and most of it has gone to the wealthiest in the state and anyone with a special interest,” Klehs said in an interview.

Legislators and past governors have been unwilling to raise the taxes needed to cover the expenses of a rapidly growing state “while giving tax breaks to every Tom, Dick and Harry who comes along,” he said.

The California Tax Reform Assn.’s lobbyist, Lenny Goldberg, is more graphic in his description: “We’ve called the system a roach motel. Once a special interest crawls in (and gets a tax break), it doesn’t crawl out again.”

His group, which includes teacher and public employee unions, is urging lawmakers to close tax loopholes as an alternative to cutting government services.

Even as Wilson and lawmakers were trying to figure out how to resolve a projected $12.6-billion revenue shortfall over the next 15 months, the Legislature this month overwhelmingly passed and sent to the governor one big multimillion-dollar tax loophole.

The bill revived a tax exemption for solar energy systems that had expired Jan. 1.

The measure, by Sen. Becky Morgan (R-Los Altos Hills), was sought by Luz International. The company built and operates nine solar units in the desert between Barstow and Boron--vast fields of mirrors and heating coils that generate more electricity than any other solar firm in the world.

Luz wants to double the amount of energy it produces with four more units, which would generate enough electricity to fill the needs of a town of 500,000. Under the Morgan bill, each new $200-million unit would be assessed at $40 million, saving investors an estimated $1.6 million per unit in property taxes each year. The company contends that without the property tax break the plants would not be built.

A handful of lawmakers fought the bill, contending that its sole beneficiary would be Luz, which already enjoys substantial state and federal tax credits as a solar energy producer.

“It’s the worst bill of the year,” Klehs said. “It’s a total scam.”

Morgan, a strong business supporter, defended the bill, which has the backing of the solar power industry and the Sierra Club, which wants to encourage the development of alternatives to burning fossil fuels.

“This is good environmental policy, this is good economic policy,” Morgan said.

The company has reported paying more than $40,000 in campaign contributions from 1988 through the end of last year. Most of the money went to legislators, but the payments included $2,000 to Wilson and $1,000 to his Democratic opponent in last year’s governor’s race, Dianne Feinstein.

When asked why Luz asked her to carry the solar tax exemption bill, Morgan said: “I think I was the only person who never received a campaign contribution from Luz.”

The governor has until midnight Monday to decide whether to sign the legislation. If Wilson rejects the Luz bill, it would be his first veto since taking office in January.

Morgan is also the author of a bill that would continue to allow companies to carry forward their business operation losses as a tax credit for up to 15 years. The bill would be a particular help to struggling new companies that typically suffer losses in their early years.

Although critical of other tax breaks, Democrat Klehs agrees with Morgan and has included an extension of the tax credit in his own legislation. Without legislation, the credit would expire at the end of this year.

An analysis by state fiscal experts calculated the cost of the tax break at $600 million a year.

Morgan said the decision to continue the credit would have no impact on the state treasury until the 1993-94 budget. Opponents complain that continuing the tax break will get in the way of efforts to develop a long-term solution to chronic budget deficits.

Morgan and others point out that many bills that selectively cut taxes have a deep emotional appeal.

One such bill would extend a special homeowner’s tax exemption for veterans to the surviving spouses of Californians who died in the Persian Gulf War. The exemption is worth about $40 a year.

Even lobbyist Goldberg is careful not to oppose that one. He concedes that other measures also have broad-based appeal. “But this year the sponsors are going to have to come up with some way of paying for it,” he said.

Among the bills before the Legislature that Goldberg places in this category are a small number of ride-sharing proposals--measures that provide expanded tax credits for companies that encourage employees to use mass transportation or to ride to work together.

Advocates of these and other tax-cutting bills note that a loophole to some is a matter of fairness to others.

Consider the Brussels sprouts.

Steve Bontadelli and his family have been growing the tiny, cabbage-like vegetables for more than 20 years on their ranch of rolling hills along the coast near Watsonville. The Bontadelli Brothers Ranch may be the largest producer of Brussels sprouts in the country.

Two years ago, the Santa Cruz County tax assessor decided that the property had been undervalued--that the property should be taxed as if the Bontadellis did what their neighbors did and grew a more profitable crop--strawberries.

The difference in tax rates has cost the family business $6,800 a year.

“It’s the principle,” Bontadelli said. “We’ve already spent more money fighting this than it’s cost us.”

The influential California Farm Bureau Federation has taken up his cause, persuading Sen. Henry J. Mello (D-Watsonville) to carry a bill that would force assessors to set tax rates on farmland based on what the farmer grows.

“It’s a matter of precedent,” said Farm Bureau lobbyist John Gamper. “We don’t want tax assessors in essence dictating agricultural use.”