Key Tax Credit Could End for Manufacturers

California manufacturers, already in the doldrums because of weakness in the nation’s economy, face the prospect of losing a major tax credit that saves them as much as $450 million a year and was aimed at stimulating job growth.

Manufacturers received the tax break as part of an effort to help end the recession of the early 1990s. But in a sign of the times, they could lose it starting in 2004. The reason: Job growth, particularly in high tech, has stalled. And that, in turn, may trigger an automatic end to the tax credit.

“It is a real threat,” said lobbyist Chris Micheli, who represents an array of manufacturers, from aerospace giant Lockheed Martin Corp. to Bronco Wine Co. If the break isn’t extended, he added, the result “would be catastrophic.”

Yet with the state facing a $21-billion-plus budget deficit, others view the potential disappearance of the so-called manufacturers’ investment credit as one way to raise revenue to pay for government operations.

“This tax credit has been a massive failure,” said Lenny Goldberg, lobbyist for the labor-backed California Tax Reform Assn. “If you spend billions and have nothing to show for it, you ought to do away with it.”

Although continuing the tax break will have support from Republicans and some Democrats, the fate of legislation to keep it going is uncertain, given the depth of the state’s budgetary black hole. The Davis administration was noncommittal about whether the governor would advocate extending the tax credit.

“The governor recognizes the value of the credit,” Gov. Gray Davis’ press secretary, Steve Maviglio, said Thursday. “But these are difficult budget times, and everything is under review.”

Republican Gov. Pete Wilson first pushed for the tax break in 1993 as a central part of an effort to revive the economy during the recession of the early 1990s. The tax credit also was part of Wilson’s attempt to improve relations with business groups after he presided over tax increases during his first years in office.

The statute took effect in 1994 and provides companies with a 6% tax credit to offset the cost of installing new equipment. Manufacturers have used the credit to shave $400 million or more a year from their tax bills.

Then-Speaker Willie Brown (D-San Francisco) carried the legislation in 1993 to create the credit, despite opposition from other Democratic legislators and organized labor.

Foes of the measure had argued that manufacturers would use the credit to automate factories, which would hasten layoffs in the high-paying manufacturing sector.

To quiet the critics, Wilson and Brown agreed to tie the tax credit to job creation.

The legislation included a provision that the tax credit would remain in effect only if there were 100,000 more manufacturing jobs in 2001 than there were in 1994 -- a low point for the sector.

During the late 1990s and into 2000, manufacturing job growth exceeded the 1994 level by 200,000 jobs.

In this latest economic downturn, however, there has been “a precipitous decline in manufacturing, particularly in electronics and the high-tech sector,” Goldberg said.

In order for the credit to remain in place, the number of manufacturing jobs would have to be 1.877 million.

Citing state employment numbers and legislative analyst estimates, Goldberg said the number of manufacturing jobs is 1.799 million, barely above the 1994 level.

Businesses, which are likely to be forced to swallow other state tax hikes in the coming year, are preparing to mount a lobbying drive to save the manufacturing credit.

“I’m outraged that anyone would be thinking about eliminating this now,” said Jack Stewart, president of the California Manufacturers & Technology Assn. “We ought to be doubling the manufacturers investment credit, rather than taking it away.”

Manufacturers place at least some blame for their woes on decisions made by Davis and his administration that they say have led to higher electricity rates and increased workers’ compensation costs.

“The timing could not be worse” to have the credit come to an end, said state Sen. Dick Ackerman (R-Irvine), a budget committee member.