Dealing a blow to efforts to keep Irvine-based Taco Bell in California, a Senate committee Wednesday narrowly rejected a measure that would have given a tax break to companies that expand or establish corporate offices in the state.
The Senate Revenue and Taxation Committee defeated the bill by Assembly Speaker Willie Brown on a 5-4 vote after several committee members expressed concerns that the tax cuts would drain the deficit-racked state treasury of too much money.
Brown, who has put his prestige and muscle behind state efforts to keep Taco Bell and other corporations from moving out of state, was undeterred. "Anyone who knows Willie Brown knows I'm not going to give up," the San Francisco Democrat said. "I'm never done on any issue until term limits take me out."
Brown and backers of the proposal had trumpeted the tax break as a way to win the battle to keep Taco Bell from moving its Orange County corporate headquarters, which employs 1,000 people, to Texas. Capitol insiders said the tax breaks yielded by Brown's bill would have been close to the $10 million in incentives being offered the company by Texas, making the move out of state no longer worth the expense.
The bill would have provided, among other inducements, a 6% investment tax credit for companies locating or expanding their headquarters in California. Companies could have accumulated the credits over five years for construction, jobs created and other expenses, and taken as long as 15 years to use the credits in their tax returns.
Officials at Taco Bell's Irvine headquarters would not comment Wednesday after the committee's action. But before the vote, corporate spokesman Jeff Lightburn said that Brown's bill was "one of many factors being considered in the greater scheme of things" and would be "viewed very positively in our final decision."
A spokesman for Gov. Pete Wilson, who is supporting Brown's efforts, said the governor remains confident that the proposal will ultimately win approval.
"The good news for Taco Bell and other California companies is that the governor and Willie Brown are working in lock-step to see that this legislation passes successfully," said Sean Walsh, the governor's spokesman. "We're confident that, working with the Speaker's office, we can get this legislation through."
Controller Gray Davis, who joined Brown in making a pitch for the bill, predicted that Taco Bell will stay put until the Legislature has another crack at the idea.
The fast-food company, a subsidiary of soft-drink giant PepsiCo Inc., has been looking for a new, larger headquarters site for nearly a year.
Two months ago, it narrowed its search to Orange County and the Dallas-Ft. Worth area. Chairman John E. Martin said recently that the company was "this close" to moving to Texas when California officials "got religion" at the end of March and began to offer inducements to keep the company here.
Business leaders and state officials are trying to convince Taco Bell that, even if the tax incentives under the new California bill fall short of the offer from Texas, the estimated $20-million cost of relocating to the Dallas area and the hassle of replacing staff members who did not move would make remaining in California worthwhile.
The company has missed three self-imposed deadlines to announce a new site.
"My belief is they'll see the process out," Davis said Wednesday.
But the Revenue and Taxation Committee put a crimp in those plans with its razor-thin decision rejecting Brown's bill. The vote split along nonpartisan lines, with Sen. Tom Campbell (R-Stanford) joining with four Democrats to defeat the measure. Two Republicans--including Sen. Rob Hurtt (R-Garden Grove)--joined with two Democrats on the nine-member committee in support.
Campbell and other opponents voiced doubts that taxes are the reason businesses are leaving California to set up shop in other states. He suggested that California's strict regulatory climate and workers' compensation problems are the reasons most often cited by businesses leaving the state.
Several others expressed worries that the tax break would only further drain the state's already strapped coffers, which are experiencing a $5-billion revenue gap. Sen. Gary K. Hart (D-Santa Barbara), for instance, said he was concerned the ultimate loser would be the state's public schools.
Meanwhile, Lenny Goldberg of the California Tax Reform Assn. said that studies have found that California ranks relatively low in state and local taxes.
"I'm suggesting that lowering taxes is a strategy that's not going to make a difference," said Goldberg, who also complained that the bill's definition of what constitutes a corporate headquarters was so broad that virtually any firm could reap the tax break.
Brown, however, said opponents had failed to consider the negative effect on the state's economy as corporations pull up stakes and move to other regions where they are offered alluring incentives.
"If tomorrow a particular corporate headquarters moved out, how could you not conclude that there would be some loss to the general fund at some level?" he asked members of the committee.
The state Franchise Tax Board, however, predicted the tax credit would cost California upward of $420 million in revenue over a five-year period. Moreover, a Revenue and Taxation Committee staff analysis of the bill determined there was no evidence tax incentives stimulate enough economic activity to guarantee they pay for themselves.
But an analysis performed by proponents of the bill estimated that revenue losses would be offset by nearly $550 million in additional income taxes and other fees generated by a boost in business.
Officials with Brown's office said that a company building a $100-million headquarters would cost the state $7.2 million in tax credits, but provide 1,500 jobs and attract an additional $33 million in state revenue for a net gain of nearly $26 million.
After the vote, Brown would not discuss how he intended to revive the proposal, but lawmakers in Sacramento typically breathe new life into moribund bills by amending them into other measures, often during the final days of the legislative year.
There has also been talk between Brown and other legislative leaders of a summer conference committee to craft legislation providing corporate tax breaks designed to keep California companies from leaving and to entice others to relocate here.
Senate leader Bill Lockyer, a Democrat from Hayward, had expressed skepticism about Brown's bill in recent weeks but conceded that lawmakers would probably pass some sort of business tax break this year to try to stimulate the economy. He advocated an across-the-board corporate tax cut that would save businesses about $160 million a year.
H. Fred Mickelson, a Southern California Edison executive who is leading the state's effort to keep Taco Bell in Orange County, said he was disappointed but not discouraged at the committee's vote.
"I understand that when you have innovative legislation like this, it takes time," he said. "This is just Step One. I'm looking at the glass as half full, and we just have to pour more votes into it."