Democrats Push Some Tax Cuts

As Democratic lawmakers complain that the state budget crisis cannot be solved until Republicans agree to raise taxes, members of their own party are pushing no fewer than 30 bills that would lower taxes paid by favored industries and individuals.

Despite a budget shortfall estimated to be as much as $35 billion over the next 15 months, Democrats have proposed tax breaks for drug companies, manufacturing and high-tech firms and start-up businesses.

Republicans, true to their anti-tax rhetoric, have proposed the most breaks, offering 50 bills -- including one that would abolish the state income tax. But the Democratic proposals stand out, in part because Democrats are leading the charge for tax hikes as a solution to the state’s budget problems, and are denouncing Republicans for balking at raising taxes.

That Democrats are carrying tax cut bills amuses Republicans.

“I never use the word disingenuous,” said Sen. Dick Ackerman (R-Irvine), the lead GOP member on budget matters. “But it is totally inconsistent with their public position about raising taxes. If it moves, they want to tax it.”

Assemblyman Mark Ridley-Thomas (D-Los Angeles), for one, hopes to use the tax code to help lure a National Football League team to play at the Los Angeles Memorial Coliseum. Under his measure (AB 1003), any professional sports franchise would be exempt from corporate profit taxes for five years if it located in a redevelopment area.

“This is a no-cost, economic stimulus bill,” Ridley-Thomas said recently, predicting that a football team would invigorate the city’s economy. “It is creating jobs and not costing the public sector or the general fund anything.”

The contention that tax breaks create jobs is the stuff of heated debate in Sacramento. Republicans and business lobbyists generally argue that tax cuts spur the economy.

Democrats and their allies are skeptical that the state tax code has much effect on business decisions. They generally argue that the state needs its tax money to keep government programs afloat.

“The Legislature is talking about taking health coverage away from low-income working parents and slashing education spending,” said Jean Ross, director of the California Budget Project, a labor-backed nonprofit that tracks the state treasury.

“At the same time,” Ross added, “there are measures to grant tax relief to sports franchises, which would have to be paid for by even deeper spending cuts. Juxtapose tax breaks for NFL franchises against community college cuts.”

The bulk of Sacramento’s money comes from taxes on income, sales and corporate profits.

Like the federal tax system, California’s tax code allows people and businesses to avoid paying billions in taxes each year for reasons that lawmakers deem to be in the public interest.

For example, to encourage home buying, the state allows homeowners to deduct mortgage interest. Consumers don’t pay sales taxes on food, and businesses can get tax breaks for providing jobs in designated high unemployment areas.

Assemblyman Marco Firebaugh (D-Los Angeles) said there are tax breaks “that actually work.” He has a bill, AB 678, to exempt start-up companies from corporate taxes for their first three years or until they gross $500,000 or more. The state Chamber of Commerce backs the bill, as does the Los Angeles-based association of Latino business owners.

Only a handful of the tax measures have been heard in committees, and only one has won approval in any legislative committee. That measure would exempt disabled veterans from some of their property taxes.

In this year of billion-dollar shortfalls and plans for deep cuts in health and education, there are fewer tax cut bills than in years past. Though not all are expected to pass, Capitol veterans say any final budget package is certain to include a mix of tax increases on some Californians and reductions for others, generally those who employ the most adept lobbyists.

A few of the Democratic bills would tinker with taxes imposed last year to help bail the state out of budget problems. Trying to accelerate tax payments, the state required that real estate sellers withhold 3.3% of a property’s sale price for taxes. However, that statute failed to take into account that a property might have been sold at a loss. This year, four bills, including AB 1338 by Assemblyman Edward “Ed” Chavez (D-La Puente), would modify or repeal last year’s change.

Also last year, Gov. Gray Davis and the Legislature suspended a tax break that allowed businesses to deduct losses in one year from profits made in future years. Companies engaged in research and development are among the main beneficiaries of the so-called net operating loss provision, worth about $400 million a year in exemptions.

Assemblyman Gene Mullin (D-San Mateo) is carrying a bill (AB 743) that would allow companies that incur losses while developing biomedical products to, in essence, sell losses -- and the tax breaks they create -- to firms that take over a product’s development. Backed by organizations representing such biotech and pharmaceutical companies as Genentech and Merck, Assemblywoman Ellen Corbett (D-San Leandro) is pushing a separate measure (AB 243) to permit biotech firms to carry over their losses for 20 years.

“We realize this is a tough year budget-wise,” Corbett said. “But this is one of the types of industries that will give us an opportunity to dig out of our budget problem. It is important for us to allow the bio-pharmaceutical companies to flourish.”

Republican lawmakers propose the most ambitious tax cuts. Taking the biggest bite, Sen. Dennis Hollingsworth (R-Murrieta) wants to abolish the income tax, which accounts for $33.6 billion or roughly half of the money used by the state to pay for such programs as education, health care and prisons. The bill is given little chance of passing.

Freshman Assemblyman Bill Maze (R-Visalia) is pushing a more modest bill. Backed by the Howard Jarvis Taxpayers Assn., Maze’s bill would give senior citizens a break on their property taxes, saving them an average of $110 a year. Its overall cost in lost state revenue is pegged at $163 million.

For one Democrat, the proposal symbolizes the disconnection of tax cut ideas in a year when the state is struggling against the nation’s largest budget gap.

“This is just irresistible,” Assemblyman John Laird (D-Santa Cruz) said, peering at Maze at a recent hearing. “How do you propose to deal with the fact that we have a ... deficit and the proposal is to widen it by $163 million?”

Maze replied, “Certainly that is something we’re all perplexed about.” But he said property taxes force seniors to curb their spending or risk losing their homes.

Getting in a final word, Laird retorted: “I’ll look forward to seeing revenue you will support raising to pay for this.”

Republicans show a measure of consistency. No GOP lawmaker has embraced a tax increase as a way of closing the budget gap. Democrats, by contrast, are pushing both tax hikes and tax cuts.

Democratic legislators are calling for new or expanded levies on gun cartridges, booze, diapers and car registration, while the governor, also a Democrat, proposes $8 billion in higher income taxes on wealthy residents, a $1.10 per pack boost in cigarette taxes, and a 1% jump in the sales tax that all consumers pay.

Davis himself is pushing the year’s richest tax break -- one to extend a $400-million annual tax credit for manufacturing firms that buy new equipment. Without legislation, the Manufacturers’ Investment Credit is set to expire this year. Eight bills have been introduced to retain or expand the tax break.

To help manufacturing during the recession of the early 1990s, then-Gov. Pete Wilson and the Legislature granted companies a 6% tax credit on new equipment purchases.

All manufacturers, ranging from computer chip makers to gun makers, can claim the credit for equipment purchases.

The State Board of Equalization, which interprets tax law, has issued decisions expanding the credit to cover bakeries, dairies, wineries, grocery stores, and others.

Davis contends that, in part because of the credit, California’s manufacturing base, though stumbling, has not suffered during the economic slowdown as badly as manufacturing has in the rest of the country.The nonpartisan Legislative Analyst’s Office, taking a dim view of such tax breaks, said in a report last year: “Investment credits of this type have not been shown to be particularly effective or efficient at generating economic activity.”

The original 1993 legislation contained a jobs-related provision. Fearing that automation might lead to layoffs, Democrats insisted on an amendment saying the tax credit would end without at least 100,000 more manufacturing jobs, starting in 2001 and in each year thereafter, than there were in 1994, when there were 1.664 million. In January, the number fell to 1.599 million, triggering the credit’s demise unless it is reinstated.

Several Democrats have offered bills to extend it. One has a bill to expand it and extend the break to telecommunications companies.

“Everybody agrees we have a budget crisis,” said Jack Stewart, president of the manufacturers association.

“But we also have an economic crisis. If you don’t solve the economic crisis, if you don’t get the economy kick-started, you’re never going to solve the budget problem.”