Firms Pay Nothing, Get Plenty
A small group of companies that paid no California income tax has begun receiving millions of dollars in refunds after a powerful state board ignored its staff and ordered the checks issued.
The move has outraged critics, who call it an $82-million corporate giveaway at a time when the state has no money to spare. The dispute has revived calls from some to abolish the agency that issued the ruling: the state’s five-member Board of Equalization.
“I can’t imagine anyone would be so brazen, particularly when the budget deficit is as large as it is and possibly growing,” said Assemblyman Mark Ridley-Thomas (D-Los Angeles).
The Board of Equalization, which implements state tax policy, voted 4 to 0 -- with one abstention -- earlier this month to begin writing checks to the firms.
The first batch of checks, totaling $5 million, went to Conexant Systems of Newport Beach, Grundfos U.S. Holding of Fresno, and Lightwave Electronics of Mountain View.
In all, 22 companies that paid no income taxes are positioned to get $82 million under a manufacturing tax credit.
State tax attorneys say the credit, which expired in 2003, was intended to attract and keep manufacturers in California, but not to provide refunds to companies paying no income tax.
Board of Equalization members disagreed.
“High-tech companies often have no income in the beginning,” said board member Bill Leonard, a Republican from San Bernardino.
“They lose money, especially in the first two years or so, when a lot goes into research and development. This credit was designed to help them,” he said.
Paul Hefner, a spokesman for state Controller Steve Westly, a Democratic member of the board who also voted for the refunds, said: “From our perspective, the board was only carrying out what was a legislative compromise.”
But former Assembly Budget Committee Chairman Darrell Steinberg called the decision “an example of how unfair the tax system is in California.”
“It is almost too obvious to state. If we are going to give companies a tax break, they ought to be contributing something to the state,” he said. “It is just another example of how some benefit from a loophole while so many others struggle.”
The refunds are tied to a decade-old tax break called the manufacturers investment credit, which reimbursed manufacturing companies for purchases of new equipment. California enacted the 6% tax credit during the recession of the 1990s to help create manufacturing jobs.
The value of the credit has long been debated, and the nonpartisan legislative analyst’s office ultimately found little evidence that it had generated economic growth for the state.
Lawmakers agreed and allowed the credit to expire in 2003, after it failed to live up to its promise of creating 100,000 manufacturing jobs over 10 years.
But while the credit has been eliminated, the controversy goes on. The refunds now at issue are tied to equipment purchases the companies made while the tax break was in effect.
And checks are being sent despite a dispute with the Legislature the last time the board issued similar refunds. That disagreement followed the board’s decision in the summer of 2003 to pay $6.3 million to LSI Logic and Cypress Semiconductor Corp. -- neither of which had paid any income tax.
Former Senate leader John Burton pushed through a law (SB 1064) soon afterward to block any more such payments, and the Legislature approved it. But a last-minute amendment added in the Assembly sought to exempt the 22 companies that already had applied for refunds.
That law is now subject to vastly different interpretations.
Burton is irate. He said the Assembly changes never authorized payments for the 22 firms, but only called for a hearing on them. Board of Equalization members disagree, and they say the Assembly’s directions are clear.
Westly’s aides produced more than a dozen letters, most from Democratic lawmakers, urging the controller to vote for the payments.
“To change the law would be tantamount to changing the speed limit from 55 to 45 and issuing tickets to everyone who drove 55 before the change in the law,” wrote Assemblyman Jerome Horton (D-Inglewood).
But board member Betty Yee, a Democrat from San Francisco, said she agreed with Burton’s interpretation of the new law, and she abstained on the vote.
Several lawmakers and tax-reform advocates said they found the payments offensive.
“This is complete lawbreaking, as far as I am concerned,” said Lenny Goldberg, executive director of the California Tax Reform Assn., a Sacramento-based nonprofit organization that receives support from labor unions and other groups.
Assemblywoman Lois Wolk (D-Davis) is using the latest dust-up to renew her call to dismantle the obscure but powerful Board of Equalization. Doing so would require amending the state Constitution.
The board is the nation’s only elected tax commission. Its five members serve as judge and jury in settling tax disputes that companies and individuals have with the state.
Wolk proposes replacing the board with a tax court made up of judges who would be appointed by the governor for 12-year terms.
Numerous such proposals have been made in the last 20 years without success.
Labor unions and groups such as Goldberg’s say abolishing the board would bring fairness to what they say is now a politicized hearing process.
Proponents of the change contend that the current system is disjointed, unprofessional and uneven in how it applies tax law.
Business groups oppose any such change, arguing that it would create an even more complicated system for taxpayers to sort through, run by judges with no accountability to the public.
The California Taxpayers Assn. warned that the proposal for a tax court “creates an extremely complicated and tangled road for taxpayers” and “raises several constitutional questions.”
Among them is whether people would keep their right to appeal decisions by state tax officials in state court.
But Craig Reynolds, a spokesman for Wolk, said that the refund controversy underscored the problem with the current system, in which elected board members rule in tax disputes involving potential political donors.
Many of the companies that have refund cases before the board, including two of the three that won them this month, are represented by the accounting firm PricewaterhouseCoopers.
Since the spring of last year, PricewaterhouseCoopers has contributed $5,300 to each of the board members who voted for the refunds except Westly.
Westly had received $10,000 from Hewlett Packard Co., which might have its own refund case before the board in the coming months.
“This again makes the case for an independent tax court that would make those decisions based on legal precedent and not political influence,” Reynolds said.