Debate Starts on Firms’ Tax Credit

Lawmakers opened debate Monday on whether to renew a $400-million annual tax break for California businesses even though it has failed to obtain the kind of manufacturing growth its drafters promised.

The manufacturers investment credit was gaining momentum in the Assembly late in the day despite a critical opinion issued earlier this year by the nonpartisan legislative analyst’s office.

Analysts said the 6% income tax credit for equipment purchases is of dubious economic value, and that the $400 million it costs California in lost taxes could be better spent plugging the state’s budget hole.

Yet lawmakers from both parties opted to heed the calls of business groups and the Davis administration, which warn that ending the manufacturer’s credit, or MIC, will cost tens of thousands of jobs and force companies to relocate to other states.

“The current business environment in this state can be labeled hostile, at best,” Assemblyman Ronald Calderon (D-Montebello) said at a hearing of the Revenue and Taxation Committee. Calderon is the author of AB 122, which would extend the tax break until 2009. “California will lose more manufacturing businesses if the [credit] is not extended.”

The committee is poised to approve the bill.

Unions and advocates for the poor are warning against extending the tax break, saying it has cost California billions of dollars without producing economic benefits.

“The MIC has failed to do what it promised to do,” said Lenny Goldberg of the California Tax Reform Assn.

The tax break was set to expire this year as a result of a jobs-related provision in the original 1993 law.

Gov. Gray Davis called in his budget proposal for extending the credit, saying it has helped keep manufacturing in California from getting hit as hard as it has in the rest of the country.

All manufacturers, ranging from computer chip makers to gun makers to newspapers, can claim the credit for equipment purchases under the law. The state Board of Equalization, which interprets tax law, has ruled that the credit also applies to bakeries, dairies, wineries and grocery stores, among others.

Jean Ross, executive director of the California Budget Project, told lawmakers at the hearing Monday that much of the $400 million per year is used to help a relatively small number of large companies shield themselves from the bulk of their state taxes, while doing nothing for 90% of manufacturing businesses in California.

If any lawmakers on the committee were impressed by the arguments in opposition at Monday’s hearing, they didn’t say as much.

“Whatever one’s political perspectives, it’s incumbent upon us to strengthen the economy in this state,” said committee Vice Chairman Mark Wyland (R-Escondido), speaking in support of extending the credit.