Tax Hike Measure Prompts High-Stakes Showdown : Prop. 167: Backers seek increases on businesses to provide state services. Opponents predict huge job losses.

Proposition 167, the sweeping tax initiative on the November ballot, would have the most dramatic impact on California taxpayers of any measure since Proposition 13 touched off a nationwide tax revolt 14 years ago, proponents and opponents agree.

But unlike Proposition 13, which sought to limit taxes and corral free-spending bureaucrats, Proposition 167 is asking voters to adopt the largest package of tax increases in state history in a stopgap effort to fill government coffers stripped bare by recession.

And unlike Proposition 13, which heralded California as a tax haven for retirees and families, Proposition 167 would add to the state’s already sullied reputation among business people as the home of red tape and high costs, opponents charge.

The campaign is shaping up as a multimillion-dollar showdown between public employees’ unions seeking to save their members’ jobs and a coalition of businesses that maintains the tax measure would cost California more than 100,000 jobs as companies leave the state--or close down--to avoid paying more taxes.

The initiative would raise $1.1 billion to $2.1 billion annually in new or increased taxes on businesses and wealthy individuals. It also would eliminate tax deductions and exemptions for banks, oil companies and insurance concerns, while cutting the sales tax and extending renters credits to taxpayers in all income brackets.

The overall corporate tax rate would increase to 10.3% from 9.3%. Individuals earning more than $250,000 annually, and couples who earn more than $500,000, would have their tax rate raised to 12% from 11%. The proposition would raise the tax on insurance premiums by 0.11% to 2.46% and impose a 3% fee on the value of each barrel of oil pumped from the ground.

Lucrative executive compensation packages would face additional corporate income taxes and local governments would be empowered to levy taxes on banks.

The complex measure--which adds more than 35 pages and 19 changes to the tax code--would reduce the sales tax by 0.25% and repeal the so-called snack tax on newspapers, candy and junk food.

Proponents--organized into a group called Californians for a Recovering Economy--say it closes loopholes and brings fairness to the unwieldy tax system. Their measure may even lure businesses to California, they say, by upgrading education and other quality-of-life services.

In fact, the state legislative analyst said that reductions in sales tax would leave consumers with more spending power and that increased government spending also could “have positive effects on the state’s economy.”

“Additional spending in such areas as infrastructure, education and job training programs could improve the state’s attractiveness for business investment,” the independent analyst concluded.

But opponents say the initiative would end up costing every Californian--through higher prices, loss of jobs and continued recession.

A study by the governor’s Office of Planning and Research found that in the long term, total tax revenues could actually drop as the business base shrinks from layoffs and closures. “The economy is at the limits of cost-effective taxation,” said Richard Sybert, director of the research office.

“It’s going to hit those businesses--aerospace, entertainment and high tech--that we are desperately trying to keep in California,” said Kirk West, president of the California Chamber of Commerce and chairman of the No on 167 campaign.

A study on the economic consequences of Proposition 167 conducted by the consulting firm of Foster Associates for the California Chamber of Commerce concluded that “the initiative would result in significant economic dislocations, effectively pushing the economy down to a permanently lower growth path.”

The study found that 29,000 to 33,000 jobs would probably be lost in 1993, with the loss becoming 50,000 to 100,000 jobs annually through the remainder of the 1990s.

Some business leaders find this encouraging, but they are from out of state.

“Proposition 167 is going to do good things for us,” said Dennis H. Stein, president of the Nevada Development Authority, who is expecting an exodus of jobs to his state, which has no income tax.

Still, proponents argue that the economy could be aided by Proposition 167.

“In the short term, we’ll inject a lot of money in the economy,” said Lenny Goldberg, executive director of the California Tax Reform Assn., which is funded largely by public employees’ unions.

Although business interests say that increasing taxes in a recession is the worst possible timing, Goldberg counters, “The worst thing we can do is run down our schools and our infrastructure.”

“We’re being bullied by the corporations,” said Sharon Delugach, executive director of Coalition ‘92, a consortium of 110 grass-roots political, labor and charitable groups in Los Angeles that support Proposition 167. “Their argument is ‘you do this and we’ll leave.’ Well, the fact is, we haven’t had these taxes and that hasn’t brought more business in.”

Proponents say the additional tax revenue is not meant to be a panacea for all that ails state and local government.

“There’s nothing fancy here,” said Ralph J. Flynn, executive director of the California Teachers Assn. “It’s the beginning of a process to bring more revenue into the state. That’s it.”

Flynn and other proponents say that even with the increases, California’s tax levels “are not out of line.”

Corporate tax directors say that California’s business taxes are currently in the mid-range among the 50 states--when taking into account income and property taxes, sales taxes and various license fees and other levies. According to U.S. Bureau of Census figures, California ranks 11th in the total tax burden on a per-capita basis and 21st based on taxes per $100,000 worth of income.

“California stacks up mediocre at the moment,” said Eric Ryan, director of taxes at Cupertino-based Apple Computer Inc., which has most of its production and engineering facilities in California. “But it will go off the charts if (Proposition) 167 passes.”

The state legislative analyst found that overall corporate taxes will leap about 20% under the terms of Proposition 167. Some private corporations put the figure at nearly 40%.

The American Council of Life Insurance estimates that taxes for its industry will surge by at least $81 million a year under Proposition 167. Bank taxes levied at the local level could increase by $100 million, according to the legislative analyst. A new 3% tax on oil would collect about 60 cents for every barrel that is pumped, oil executives said.

“All of these increases will ultimately find their way into a gallon of gasoline,” said Ken Dickerson, senior vice president of Arco, which contributed at least $300,000 to the campaign to defeat Proposition 167.

“It’s critical that voters understand that they can’t impose these costs on business without consequences,” said Larry McCarthy, president of the California Taxpayers Assn., a lobbying group supported by business interests. “If they can’t pass them on, they’ll reduce costs. And that’s usually labor.”

The threat of job losses is the central theme in the No on 167 campaign in repeated radio advertisements that began in August. “After three years of cutting, there is no fat,” says printing shop owner John Kennett in one radio ad. “So additional tax burdens placed on us by Prop. 167 have to come out of jobs.”

Several economic studies have found that California has lost at least 700,000 jobs since peak employment was reached in 1990. The Chamber of Commerce says that 70,000 to 100,000 of those jobs have been lost to neighboring states.

A study conducted by the consulting firm of Bules & Associates for a group of California’s largest power utilities found 1,035 instances of California companies moving or expanding in other states during the last 10 years. That represents the direct loss of 224,000 jobs and the indirect loss of about 119,000 additional positions.

Taxes were not the primary cause of relocations, according to the study, but 60% of the firms cited the “business climate,” which includes “the tapestry of laws, regulations taxes and permits.”

But not all economists agree on how many jobs have been lost to other states.

Bob Arnold, senior economist with the Center for the Continuing Study of the California Economy, said the “the loss of jobs over state lines is peanuts.”

Still, many business leaders say that adding taxes to California’s existing problems of costly workers’ compensation, environmental restrictions and cumbersome regulation could be enough to tip the balance in favor of moving.

“It’s the straw that will break the camel’s back,” said Sybert of the governor’s Office of Planning and Research.

Small business is expecting to bear much of the impact of any tax increase.

Maxine Weinman, owner of Maxine’s Seafood Cafe in Hollywood, said “Proposition 167 will be the final blow,” after what she described as the combined effects of “R&R;: riots and recession.”

The biggest threat, she said, is rent increases. Under Proposition 167, property owned by large, publicly held corporations would be reassessed every three years, rather than when the company or property is sold. Those tax increases will probably be passed to tenants under the terms of most standard commercial leases.

“I can’t continually raise my prices,” Weinman said. “If I do, I’ll lose my customers. I’ve already reduced staff to such a degree that if I cut any more I’ll just have to close my doors.”

It is appeals such as Weinman’s that have caused even some of the beneficiaries of Proposition 167’s largess to oppose the measure.

The League of California Cities and the California State Assn. of Counties are opposed to the measure.

“Our board felt that Proposition 167 could have an adverse effect on economic recovery,” said Debbie Thornton, spokeswoman for the league. “They looked at the bigger picture, rather than the quick fix.”

Joel Fox, president of the Howard Jarvis Taxpayers Assn., agreed with Proposition 167 supporters that a reduction in sales taxes would be beneficial to the economy. And he acknowledged that there are other parts of the complex measure he could support.

But, he said, “you only get one vote on this measure. It’s ‘yes’ or ‘no’ on the whole package.” And overall, Fox said, the measure is “bad medicine. . . . We believe it will price jobs out of California.” His association is opposing the measure.

Still, proponents believe that their message of “tax the rich” will be embraced by Californians, if they can just get the word out on their limited campaign budget.

So far the campaign has raised $730,000, largely from public employees’ unions. More than $500,000 of that amount was spent to gather the signatures necessary to qualify the measure for the ballot.

Last week, the campaign began airing commercials on at least two Los Angeles television stations aimed at raising money as well as advertising the initiative. The 30-second commercial asks viewers to call a 900 telephone number to learn more about the measure. The call costs $5 for the first minute and $1 for each additional minute.

The opposition, meanwhile, has raised $3.4 million, largely in six-figure donations from the state’s biggest oil, insurance and banking concerns.

The campaign hired the political consulting firm of Woodward & McDowell, which helped big business defeat Proposition 128, the Big Green initiative, two years ago.

Goldberg acknowledges that it will not be easy to combat such a well-funded campaign, but he vowed: “We’ve put this before the voters and we’re out there to win.”

But Goldberg also said there were other reasons for putting it on the ballot, including blunting the impact of Proposition 165, Gov. Pete Wilson’s welfare reform measure.

“We wanted to change the agenda,” Goldberg said. “We said there’s a much better way to go. The nature of the debate has changed.”

But it has not all changed in Goldberg’s favor.

Some early backers of Proposition 167 are reversing their position in the face of a worsening economy.

State Assemblyman Richard Katz (D-Panorama City) was among the first to contribute to the Proposition 167 effort, but has since campaigned against it. Since the measure was proposed last winter, Katz said, “things have gone downhill.”

Proposition 167 at a Glance

WHAT IT INCLUDES

Seven tax increases.

Two tax decreases.

Extension of renter’s credits to all income levels.

Reduction of tax deductions for oil, insurance and banking companies.

Limitations on tax deductibility of executive compensation at large corporations.

Required reassessment of all real estate owned by most large, publicly traded corporations every three years.

*

WHERE THE MONEY WOULD GO

General fund: The state’s general fund, currently about $40 billion, would increase $1 billion to $1.5 billion in the current fiscal year and then an additional $1 billion a year indefinitely, beginning in the 1996-97 fiscal year.

Schools: $350 million to $700 million of new property tax revenues would be allocated to schools beginning in fiscal 1993-94.

Cities, counties and special districts: $650 million to $1.3 billion in new property taxes would be allocated to these governments.

Local agencies: A provision allowing local agencies to impose taxes on banks could raise an additional $100 million annually.

Source: State legislative analyst, Yes on 167 campaign, No on 167 campaign.