State Report Stimulates Talk of Curbing Businesses’ Tax Breaks

As harried taxpayers scramble to complete their long and short forms by April 15, they’ll find that the available tax breaks haven’t changed much in recent years. But for corporations, California’s tax code has been far kinder lately--and some lawmakers are taking a new look at that.

The details lie in a comparison of a new report by the legislative analyst and a similar study issued for 1991.

The earlier report showed that individuals’ tax breaks for such items as home mortgage interest and dependents amounted to about $13.4 billion that year, or 67% of the $20 billion they collectively paid in income taxes.

The new study shows that individuals’ tax breaks last year amounted to about $17.8 billion, or 62.5% of the total income tax they paid, which was $28.5 billion.

Although that change is relatively minor, it suggests that individuals’ tax burden has grown because their write-offs are a smaller portion of their bill.

A similar comparison shows that business has fared far better. In 1991, banks and corporations wrote off about $1.7 billion, which was a little less than a third of their total tax bite of $5.5 billion.

By last year, tax breaks allowed businesses to hang on to $3.1 billion--more than 52% of the $6 billion in overall taxes on business profits.

“Literally billions in tax breaks have been granted to business,” said Jean Ross of the California Budget Project, a liberal nonprofit group that studies state spending.

Although Ross and other critics are calling on lawmakers to review California’s tax structure, Fred Main of the California Chamber of Commerce says the breaks granted in the 1990s have made the state “a much better place to do business.”

“Business is paying its fair share,” he said. “The growth in personal income tax has come because people are employed and making lots of money. They’re employed because businesses are doing well.”

Few Democrats or Republicans have any desire to tinker with the big tax breaks that benefit working--and voting--Californians. But urged on by organized labor lobbyists, some legislators are turning new attention to the tax breaks they grant to business.

Proof of Tax Breaks’ Benefits Sought

As lawmakers and lobbyists push this year’s batch of tax cut proposals, Assembly Revenue and Tax Committee Chairman Wally Knox (D-Los Angeles) wants to add conditions requiring that any industry receiving a break report back to the Legislature with details of how the break has fostered economic development.

Knox’s goal is to have tax breaks that fail to produce benefits--such as jobs--repealed automatically.

“Through the years, scores of exemptions have built up, with a total cost of billions,” he said. “We either continue down that road, or we do something unprecedented. It is so simple--study it to see if it works.”

But without a provision for automatic repeal, there is little chance any tax break will disappear. Repealing a tax break amounts to a tax increase. Under state law, the Legislature can cut taxes with a simple majority but needs a two-thirds vote to raise them--an all but impossible hurdle to surmount.

Assemblyman Howard Kaloogian (R-Encinitas), a member of the Revenue and Taxation Committee, opposes Knox’s idea, contending that it would impose an impossible burden on industry. Kaloogian calls the effort little more than a veiled attempt to begin winnowing away tax breaks.

“The pressure will begin to build in that direction,” he predicted.

Although Democrats insist that is not their goal, labor lobbyists, emboldened by the Democratic landslide in November’s elections, have studied the legislative analyst’s latest compilation and are raising questions.

Union leaders generally are skeptical of tax cuts. Labor organizations that represent government workers believe that cuts take money from government coffers, thus slowing the growth of government jobs and money available for pay raises. Unions representing workers in private industry believe many corporations that receive tax breaks pay substandard wages.

“If you’re going to deprive the state of those funds,” said Richard Holober of the California Labor Federation AFL-CIO, “there should be a commitment by the employer receiving that break to make a long-term investment.

“To us, that means good jobs with health benefits and retirement that pay better than the median wage,” he said. “We probably can’t legislate that they are union jobs. But we don’t want jobs that are going to create paupers.”

The legislative analyst’s report doesn’t call them tax breaks or even loopholes. Nor do these measures “save” money for taxpayers.

Rather, they are “tax expenditures,” as in: Any tax that the state deigns not to collect is a cost of government operation, like the cost of building a road, buying a redwood forest, running a prison or educating a child.

‘Incentives to Stimulate the Economy’

No matter what tax breaks are called, there are tons of them. The 363-page report evaluates each one of the hundreds of breaks, loopholes, expenditures, whatevers.

They range from the home mortgage interest deduction to the myriad large and obscure breaks that, when combined, save corporations billions of dollars every year. And each has its defenders.

“Don’t call them tax expenditures. They are incentives to stimulate the economy,” said lobbyist Chris Micheli, whose firm, Carpenter Snodgrass Associates, represents corporate clients, including oil, insurance, tobacco and telecommunications companies.

Altogether, it is projected that the state will raise $73.3 billion this year in personal income taxes, sales taxes and taxes on corporate and banking profits. So-called tax expenditures will cost the state--or save taxpayers--$27.1 billion, the legislative analyst found.

The home mortgage interest deduction, by far the most valuable income tax “expenditure,” saves homeowners $3.03 billion a year that otherwise would flow to Sacramento.

Taxpayers who claim income tax credits for dependents lower their collective tax bill by $1.3 billion.

This year, California’s tax on bank and corporate profits will bring in a projected $5.9 billion, with tax breaks saving businesses $3.1 billion.

Among the richest tax breaks is the credit granted to manufacturers who buy new equipment. The Legislature created the break in 1993 as part of an effort to bring the state out of the recession. Its goal is to encourage manufacturers to expand operations in California. This year, the credit will save manufacturers $390 million.

California’s large high-tech industry is the biggest single beneficiary of the credit, receiving almost 27% of the benefit, or more than $100 million a year. Oil companies are close behind.

The handful of oil companies that operate refineries receive 25% of the credit.

Lobbyist Lenny Goldberg, a tax expert who represents labor, said the oil companies received the bulk of the tax credit in the 1990s because they were forced to retool refineries to meet state and federal clean air requirements. He contends that the companies would have retooled whether or not they received the tax break.

“That’s his opinion,” said Chevron lobbyist Denny Samuel, who pushed for oil industry inclusion in the legislation creating the manufacturers investment credit. “What we were trying to achieve was parity. If the manufacturers investment credit was supposed to reward companies in California, then why would you exempt the oil companies?”

Like the manufacturers’ credit, the rationale behind most business tax breaks is that they will stimulate specific sectors of the economy. For example:

* There is no sales tax on property used in connection with space flights, saving firms $12 million a year. That is designed to encourage the development of a commercial space industry in California.

* Nor is sales tax charged for equipment used to repair aircraft. That saves airlines $16 million a year. Again, the point is to encourage airlines to locate repair facilities, which provide high-paying blue-collar jobs, in California.

* Many of the tax breaks are aimed at protecting big industries. Although individuals must pay sales tax when they rent videos, theaters pay no sales tax when they lease movies from studios. That saves the entertainment industry $32 million annually.

Scanning a list of California’s various tax breaks, Senate Budget Committee Chairman Steve Peace (D-El Cajon) said: “I don’t see any that I would pick a fight with.”

“One man’s tax break is another man’s tax equity,” he added.

However, Goldberg sees an opportunity in the discussion spurred by the legislative analyst’s report. Perhaps, he said, lawmakers might rethink how tax breaks are distributed among the population.

For example, employer contributions to employee pension plans cost the state--and save employees--$2.6 billion a year. However, taxpayers earning more than $500,000 a year receive almost a fourth of those benefits, even though they make up less than 1% of the population.

“It starts to raise the right questions,” Goldberg said of the analyst’s report, “even if it doesn’t get you to the right answers.”