Manufacturers Push Brown’s Tax Break Bill

A drive by Democratic Assembly Speaker Willie Brown and California industrialists to give manufacturers a $900-million tax break is meeting tough resistance from Democrats in the Senate.

As a top legislative priority of the business community’s effort to kick-start California’s economy, the bill would exempt manufacturers from paying the state’s 6% share of the statewide sales tax when buying new equipment.

The influential California Manufacturers Assn., sponsor of Brown’s proposal, maintains that an immediate tax cut would give manufacturers an incentive to invest in new purchases, with the increased economic activity rippling through California and creating jobs.

The business community also wants to streamline the state’s environmental quality controls. Last month, Gov. Pete Wilson signed another central element of the business plan, a bipartisan overhaul of the workers’ compensation system.

The manufacturers and their supporters argue that the entire business program must be enacted if California is to be competitive with other states and successfully market itself as “back in business.”

But the tax cut proposal comes as the state’s budget is precariously balanced. And voters will consider a permanent half-cent sales tax increase on the November ballot.

Some Democrats, labor leaders and environmentalists have expressed fears privately that the business community has seized the economic crisis as an excuse to accomplish goals long sought but never won.

As expected, the Speaker’s bill sailed through the Assembly last month with only a handful of opposition votes. But it hit a wall of opposition in the Senate Revenue and Taxation Committee, where some Democrats warned that rather than improving the state’s economy, it could aggravate California’s unemployment crisis.

They fear that armed with a tax savings, manufacturers will buy automated equipment, hastening layoffs in an economy suffering high unemployment. They want guarantees that a sales tax exemption is tied to job creation.

“They shouldn’t get a tax break for putting people out of work,” said Sen. Daniel Boatwright (D-Concord), whose Bay Area district is one of the most heavily industrialized in the state.

Although Brown’s bill failed in the committee last week for lack of one vote, he has kept it alive, and has said he is willing to amend it to protect jobs and create more. It could resurface on the Senate floor today.

“I don’t object to tying it directly to job creation,” said Brown, who has moved closer to the business Establishment on several issues as the recession has deepened.

William Campbell, manufacturers association president and a former Republican legislative leader, said he and other business lobbyists are regrouping. “We’re negotiating,” he said.

Meanwhile, the governor, who has made economic recovery a top issue as he prepares to seek reelection next year, is eager to sign the bill, provided its projected $900-million loss to the state budget can be partially offset.

“We want to sign this bill, but there needs to be at least some offset to avoid creating a deficit,” said Wilson’s spokesman, Dan Schnur. “We’re willing to negotiate on that.”

Campbell concedes that the bill would cost the state treasury between $750 million and $900 million in each of the next two years. But he argues that its “investment” benefits would so fire up the economy that billions of dollars in new revenues would be produced for government coffers by the third year.

Seven states levy some form of sales tax on manufacturing equipment while 42 do not.

A research study by Pennsylvania-based AUS Consultants, commissioned by Southern California Edison Co., concluded that the bill’s proposed 6% reduction in equipment costs “would result in a 14.9% increase in spending on new machinery and equipment.”

That finding has been questioned. The Senate Office of Research has been directed to validate the consultant’s assumptions.

In the meantime, the staff of the Senate Revenue and Taxation Committee issued a highly skeptical report. It estimated current yearly spending for equipment covered by the bill at about $15 billion.

To pay for itself, the report said, the tax cut “would have to generate a 70% increase in the current level of investment in manufacturing property.”

As Brown and the manufacturers search for a compromise, Boatwright and another opponent, Sen. Bill Lockyer (D-Hayward), have offered alternatives.

They have suggested that instead of a tax cut, the manufacturers be given an “investment tax credit” similar to one proposed by President Clinton. That way, a manufacturer would be given a write-off for creating jobs.

Lockyer has also proposed reducing the size of the tax cut.