Hailing it as landmark tax reform comparable to Proposition 13, Gov. Pete Wilson on Wednesday signed legislation giving tax breaks to California businesses and multinational companies in an effort to spur job creation and fend off a potentially costly lawsuit against the state.
The two bills signed by Wilson represent a $400-million gamble for a state treasury struggling to emerge from years of red ink.
Supporters contend that the tax cuts will stimulate the economy and create enough jobs and profits to give the state a net gain in tax revenue.
But critics say the breaks are too broad and come with no guarantee that they will create jobs. Others say the tax cuts are dwarfed by recent tax increases that hindered economic growth.
The bill-signing ceremony in Wilson's office--attended by industry leaders, lobbyists and lawmakers from both major parties--capped a year of legislative action on economic issues intended to reverse the state's self-described image as bad for business.
Wilson, who for two years has been bemoaning the state's business climate, said the tax cuts, along with bills he signed earlier to overhaul the workers' compensation system, will turn that image around.
He said the legislation would enact the most dramatic tax change in California since voters cut their property taxes by passing Proposition 13 in 1978. That measure, according to the Senate Revenue and Taxation Committee, is saving taxpayers $20 billion a year--compared to the $400 million break in the bills Wilson signed Wednesday.
"These tax reforms are the centerpiece of an economic growth agenda," Wilson said. "They will encourage investment in new equipment and new ideas that will lead to literally thousands of new jobs being created in the years to come."
The major elements in the bills include:
* A 6% sales tax exemption for start-up companies that purchase factory equipment and a 6% tax credit for older firms on purchases of equipment used for manufacturing.
* Exemption from state and local taxes for equipment used in commercial space launches originating from Vandenberg Air Force Base.
* Exclusion from taxation of half the profits earned on sale of stock in small businesses held for more than five years.
* Repeal of the "water's edge" fee on multinational corporations that was the subject of a lawsuit by Barclays Bank and the object of threats of a trade war with Great Britain.
* A 40% reduction in the surcharge on profits of closely held corporations with fewer than 35 shareholders.
In addition, the legislation makes permanent a tax credit for research and development, as well as another tax break that allows companies to use losses in one year to offset taxable income in the future.
The bills also include one tax increase: a reduction in the deductibility of business expenses for meals and entertainment from 80% to 50%.
The tax break for closely held firms was the most controversial element in the package because it will go to many wealthy Californians with no assurance that they will invest their windfalls in job-producing activities. According to the Franchise Tax Board, 85% of the adjusted gross income reported by these corporations goes to taxpayers earning more than $1 million a year.
"This is strictly a tax break for millionaires and has no bearing whatsoever on economic development," said Lenny Goldberg, president of the California Tax Reform Assn., which has argued that the tax system is unfair to the poor and middle class.
Goldberg's group sponsored a bill that would have deleted that tax break from the package and replaced it with an extension of the child-care tax credit, which is about to expire. Wilson said he will veto that bill, whose author, Assemblywoman Dede Alpert (D-Coronado), reportedly told him she was embarrassed by the linkage, which Wilson said was meant to make him look bad.
Alpert, however, issued a statement denying that she told Wilson she was embarrassed by the bill. She said he should have signed it.
Goldberg also said the manufacturing tax credits should have been tied to job-creating investments. Without that connection, he said, oil companies about to embark on multibillion-dollar overhauls of their refineries in response to state and federal clean air rules will reap a major tax break for investments they would have made anyway and which could result in the loss of jobs through increased automation.
But the tax package also took criticism from the other end of the political spectrum.
Former Republican Assemblyman Tom McClintock, director for the Center for the California Taxpayer, complained that the tax cuts amounted to "baby steps" on the road to recovery from a $7-billion tax increase enacted earlier in the Wilson Administration.
He said the $400-million gain for business was dwarfed by the $1.5 billion annual take from extension of a half-cent sales tax that was supposed to expire June 30. Wilson, who earlier said extending the tax would be a drag on the economy, changed his position and now supports Proposition 172, which would make the levy permanent and give the revenue it raises to local government.