This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
Cal-Tax Home Page | About Cal-Tax | Subscribe

California individuals and businesses are paying about $9 billion more in taxes than the state's financial wizards imagined as recently as last summer. This enormous flow of unexpected revenue was caused, as least in part, by actions that made California's tax structure more competitive for economic investment. In the past five years, 2.2 million jobs have been created in California. At the same time, total state spending has increased from the mid-$50 billion mark to more than $80 billion.

It makes good sense, therefore, for taxpayers' policy priorities for 2000 and beyond to continue to make California more attractive for investment and job creation. Policymakers can move in the right direction by keeping commitments to businesses that invest in the California economy.

As we look ahead, we must learn from the past. In the early 1990s, when the California economy was flat on its back and the state budget was awash in red ink, a legislative package of business tax credits was a key part of the recovery strategy.

Tax credits are working, but our tax system has prevented government from keeping its end of the bargain. Businesses that invest in the state's economic future, in research, development, new equipment and machinery - and provide new jobs - are unable to realize the benefit promised to them up to one-third of the time.

That is why the Legislature and Governor Gray Davis should support additional measures designed to make existing tax credits work as intended; so California will honor its commitment to businesses, both large and small, that have invested in the California economy.

Some of the steps that should be taken:

• Remove the tax traps from the unitary method of taxing multistate corporations that enable the Franchise Tax Board to reach around the globe and tax dividends and income.
   
• Make the manufacturers investment credit (MIC) permanent and increase the rate of the credit from 6 percent to 9 percent. When the MIC was enacted in 1993, at least 100,000 new manufacturing jobs were to be created to keep it going. More than 200,000 jobs came into being, yet there has been a reluctance to remove the job-creation condition. There has been bureaucratic backsliding on how the credits work.

Wm. Gregory Turner

• Tax agencies are threatening to undercut the stated public policy objectives of tax credits including the MIC. California cannot afford a reputation of a bait and switch operation on tax incentives once business invests here. Allow full utilization of tax credits among related companies.
   
• Treat taxpayers fairly. Eliminate pay-to-play for income tax appeals. Give property owners a real appeal by establishing their right to challenge property assessments in court. Taxpayers deserve full access to the legal system. California taxpayers do not have all of the legal rights that are enjoyed in other states.
   
• Allow companies to carry forward capital losses to future tax years. They also need greater ability to carry forward more of their net operating losses.
   
• Reduce personal income and bank and corporation tax rates, which are extraordinarily high compared to other states.
   
• Extend the Internet Tax Freedom Act, at both the state and federal levels, beyond the late-2001 expiration dates to guard against new or discriminatory taxation that could stifle growth of electronic commerce.
   
• Set responsible spending priorities, which are just as important in times of plenty as they are during recessions. Overly extending California's finances by plunging billions of dollars into permanent spending commitments is a big mistake. Most of the budget surplus should be invested in public works infrastructure, including water, transportation and education facilities. The public will get more concrete poured for the tax dollar on a pay-as-you-go basis than it gets from general obligation bond financing and interest payments.

California needs a vigilant Legislature to ensure that the economy continues to be stimulated by laws designed to make the state's tax structure fair and competitive.

- Greg Turner is general counsel and legislative director of the California Taxpayers' Association (Cal-Tax).