Tax-Cut Bill Could Help State’s Firms

The landmark corporate-tax-break bill passed by the U.S. Senate on Monday could provide a boost for California companies as diverse as Napa Valley wineries and Silicon Valley tech firms.

The bill, approved earlier by the House and expected to be signed into law by President Bush, would cut taxes for manufacturing companies and other key businesses in the state, including movie studios. One provision might even help trim California’s budget deficit.

Most immediately, the American Jobs Creation Act of 2004, as the legislation has been dubbed, would repeal U.S. export tax subsidies and resolve a World Trade Organization dispute that has resulted in millions of dollars of European Union tariffs on California farm goods.

Replacing the export tax break would persuade the EU to lift about $200 million in levies on U.S. farm products, said Emily Robidart of the California Farm Bureau.

In hopes of leveling the corporate playing field, Congress voted to lower the tax rate for manufacturers to 32% from 35% and broaden the types of businesses eligible for the lower rate to include such nontraditional manufacturing operations as construction companies, engineering and architectural firms, film and music ventures and oil and gas producers.

That would be important for Los Angeles County, which, in addition to being the home of the entertainment industry and several large engineering firms, is the nation’s second-largest manufacturing area.

Boeing Co., a major private employer in Southern California, has been one of the largest beneficiaries of the export tax break. Boeing said Monday that it was “very happy” that Congress supported an alternative. Previously, the company, which received $80 million to $200 million a year in benefits under the subsidy, had said it couldn’t afford to see the tax break disappear without a period of transition or a replacement tax benefit.

The bill offers a big break for multinationals that want to bring into the U.S. profits they make overseas. As it is, they pay the U.S. 35% on that money -- in addition to the taxes paid in the country where the money was earned. The bill would slash the rate to 5.25% for one year.

Various banks and government agencies estimate that there are $350 billion to $650 billion in these so-called undistributed earnings overseas. El Segundo-based toy maker Mattel Inc., for example, says it holds $2.7 billion in undistributed foreign earnings. And Hewlett-Packard Co., the Palo Alto-based computing hardware and services goliath, says it pulled in about 60% of its $73 billion in revenue last year outside the U.S.

The provision could be especially beneficial to California’s technology-heavy economy.

“Tech tends to have a high earnings component overseas,” said Gary Schlossberg, an economist with Wells Fargo Bank in San Francisco. “So California would probably get a disproportionate share of the money that is repatriated.”

The break might also create a tax revenue bubble for the state, helping offset the budget deficit by some millions of dollars, said Howard Roth, chief economist for the California Department of Finance. Though companies would enjoy a tax-rate reduction at the federal level, they would still have to pay California an 8.84% tax on repatriated profits.

Small businesses also would get some breaks. A three-year extension of a provision allowing small businesses to deduct up to $100,000 a year in capital expenditures -- which had been set to revert to $25,000 at the end of 2005 -- would be a huge incentive for firms to invest in new equipment, said Bill Bloomer, president of National Metal Stampings Inc. in Lancaster.

Unsure whether the provision would be extended, Bloomer this year purchased two new metal presses for the shop floor, an office copy machine and other equipment that he said would boost productivity while helping reduce his tax liability.

“And if I’m profitable next year, you can bet I’ll be buying more equipment,” said Bloomer, whose firm makes precision parts for the automotive, medical, aerospace and high technology industries, among others.

Bloomer said such incentives made sense because “they create jobs all the way down the line,” from machine-tool makers to the delivery people who drop off the goods.

The small-business extension would be especially good news for California’s computer and software makers because small businesses spend about one-third of their deductible capital expenditures on those products, said Bruce Hahn of the Computing Technology Industry Assn. in Chicago.

There are plenty of pork-barrel initiatives in the bill that wouldn’t benefit California much -- such as special breaks for the fishing-gear and the electric-fan industries and a $10-billion buyout for tobacco farmers. But there are more than a few rinds for the Golden State.

For example, the legislation says that if at least 75% of a movie’s production costs are spent domestically, then a producer can immediately depreciate certain expenses rather than amortize them over 10 years, as the law currently requires.

“It’s an important first step for the industry,” said Jean Prewitt, chief executive of the Independent Film and Television Alliance in Los Angeles. “It’s the first time Congress has looked at the economic issues luring film production work to other countries.”

And the state’s 1,000 wineries would get a three-year suspension of a Civil War-era tax of $1,000 a year on alcoholic beverage makers.

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Times staff writers Marla Dickerson, Chris Gaither, Abigail Goldman, Kathy M. Kristof, Marc Lifsher, Peter Pae and Jube Shiver Jr. and Times researcher John Jackson contributed to this report.