State’s Help for Business Seen as Watershed Shift : Legislation: Economists say support for pro-growth package was astounding. They see trend lasting years.

The California Legislature’s 1993 session so exceeded the expectations of those trying to fix the battered economy that it is being described as a watershed in the state’s posture toward business.

Economists said the bipartisan actions completed early Saturday confirm a shift toward pro-growth policies in California and away from a dominant emphasis on environmental and social concerns that has characterized state policy for years.

“We’ve gotten ourselves into such an awful mess that this has become a very powerful coalition of business and labor and Democrats and Republicans. I don’t expect to see this reversed for several years,” said Larry Kimbell, director of UCLA’s Business Forecasting Project.

Author Joel Kotkin, a California economic historian and a fellow at the Center for the New West, said: “That the Democrats, and especially (Assembly Speaker) Willie Brown, have supported this is astounding. This is a state that is trying to save itself.”

Virtually every major complaint from business leaders in California and elsewhere was addressed by lawmakers in a package that Gov. Pete Wilson is to sign today in Los Angeles.

The occasion is an expected announcement by Hughes Aircraft Co.--which is moving thousands of manufacturing jobs out of the state--that it has taken its Los Angeles headquarters off the sales market and will keep its main offices here as a result of the various pro-business signals from political leaders.

State officials predicted over the weekend that the legislation will lead to quick results in corporate decision-making. Though the longer-term effects are disputed, one optimistic study says the changes will spur investment that could create half a million jobs by 2004.

For example, changes to the controversial unitary tax--a levy against multinational companies based on their worldwide earnings--bear directly on about 80 projects worth $500 million that foreign firms are considering for California, said Julie Meier Wright, director of the state Department of Trade and Commerce.

“There are several companies I’m putting at the top of my list to call this week” to notify them of the changes, Wright said.

In approving this package, political leaders were responding to the dramatic downturn in California’s economic fortunes in the past three years. A costly tax and regulatory system was aggravating the effects of the recession and of defense cutbacks, triggering a flight of business and jobs out of the state and discouraging other companies from coming here.

Kimbell noted that state officials can only change conditions marginally and that California remains vulnerable to such powerful forces as the recession, defense cutbacks that ravage the aerospace industry and downturns in Japan and Europe that are hurting exports.

But the business lobby was ecstatic about the changes, which were described as unbelievable, and spectacular by William Campbell, president of the California Manufacturers Assn.

Traditionally a Republican concern, the state’s poor business climate has increasingly attracted the attention of labor leaders and Democrats. The first major step was the Democrat-controlled Legislature’s overhaul of the costly, much-maligned workers’ compensation system, signed into law by Wilson in July.

The investment tax credit was another unexpected gain for business because massive budget problems had seemed to rule out significant tax relief this year. Lawmakers approved creating a 6% investment tax credit on purchases of equipment, effective Jan. 1, 1994. It encourages businesses to invest in new equipment by granting a credit of 6% of the cost of new equipment against income taxes.

Manufacturers had sought an upfront sales tax exemption on the purchase of equipment because they would realize the savings immediately. Nonetheless, the investment tax credit will save businesses nearly as much--while delaying the state’s tax-revenue loss until 1995.

The lack of a tax break on equipment purchases was the major reason cited by Intel Corp. this year when it decided to build a $1-billion manufacturing plant in New Mexico rather than California. The state’s sales tax on equipment for the plant would have cost Intel more than $70 million.

The tax credit will help small firms and their suppliers as well. Bob Ulrickson, president of Logical Services Inc., a Santa Clara software engineering and electronic firm, said he will spend about $20,000, or 40%, more on new equipment next year than he would have otherwise.

“We’re quite pleased,” Ulrickson said.

Start-up companies can instead choose a 5% sales tax exemption. And to take care of unprofitable firms that have no income tax to claim a credit against, the investment tax credit can be carried forward as long as 10 years.

The changes to California’s unitary tax were aimed at averting an international tax dispute between the United States and Britain and heading off a potential $4-billion state liability from two court cases.

Now, multinational companies can avoid paying the unitary tax by paying a hefty fee. Legislators repealed that fee, leaving the companies subject to the same tax principals they would face in other states and countries. Lawmakers also eased financial disclosure requirements that exceeded federal requirements and that many multinational firms objected to.

Wright said the unitary tax amendments will help attract foreign investment. She said it could immediately bolster efforts to woo the Danish toy manufacturer Lego, which is weighing a $100-million theme park in Southern California versus a site in Virginia. California’s 9.5% corporate tax rate is 3.5 points higher than Virginia’s as it is, and the added uncertainty and cost of the unitary tax is an issue for Lego.

Meanwhile, the unitary tax is of such international concern that Lloyd Bentsen, secretary of the Treasury, phoned Speaker Brown last week to urge action to head off threatened retaliation against U.S.-based multinationals by the United Kingdom.

The changes enacted by lawmakers are intended to calm the British. They are also aimed at persuading the Clinton Administration to intervene on the state’s behalf in pending corporate lawsuits before the U.S. Supreme Court that demand $3.9 billion in unitary tax refunds to domestic and foreign-based multinationals.

There were several tax changes to foster small businesses and start-up firms, especially technology-based enterprises.

The Legislature broadened the definition of “research and development” entitled to a tax credit and made the credit permanent. It had been set to expire after 1997, an uncertainty that caused concern in manufacturing and technology circles.

To make it more attractive for venture capitalists to invest in small companies, lawmakers slashed by half--to 4.65%--the capital gains tax on the sale of small business stock held at least five years. They also lowered to 1.5%, from 2.5%, a tax surcharge on closely held firms.

Business leaders seemed almost as pleased with three bills aimed at easing the complex, time-consuming and often duplicative process of getting state and local permits to launch business enterprises. Major environmental groups remained neutral on most of the measures, which were billed as maintaining the state’s tough regulatory posture on air, water and hazardous materials.

The cost and benefits of the package are disputed, although late amendments narrowing the package trimmed the projected tax revenue loss to $400 million in the 1995-96 fiscal year when all provisions are in effect. But that estimate by the Franchise Tax Board does not take into account any higher investment or employment that results from the tax changes.

A study by Southern California Edison--which is affected by an unprecedented 2,000 vacant industrial sites totaling 84 million square feet, for which nobody is buying electricity--claims that the changes will pay for themselves within three years.

Edison said the investment tax credit should increase corporate rates of return by nearly one-third, leading to a 15% jump in investment--a net increase of spending for machinery and equipment of $8.8 billion over 10 years. That would theoretically create 500,000 jobs in California by 2004, roughly what it has lost in recent years.

If so, says economist Kotkin, many will be production jobs filled by people who have traditionally been Democrats--a realization that apparently helped many lawmakers see the need to create wealth rather than redistribute it.

To the charge that the tax breaks will instead end up “in the pockets of CEOs,” as one critic predicted, longtime Democratic Assemblyman John Vasconcellos of Santa Clara calls that outmoded thinking.

“This is a different take by the Democrats on how to deal with the economy and jobs,” said Vasconcellos, chairman of the Ways and Means Committee, who helped engineer the tax package after about 90 meetings with owners of technology firms around the state.

“Fifteen years ago I met David Packard,” he said, referring to the Hewlett-Packard co-founder. “He said: ‘Young man, you need us to create jobs. We need you to build the infrastructure.’ At the time it was seemed kind of abstract. Now it’s concrete.”