State Budget and Tax Relief Priorities

By Kirk West, William Campbell and Larry McCarthy

The California business community believes it is critical that the 1997-98 state budget be formulated within the context of these economic and fiscal realities facing our state:

Do Not Spend the Windfall.

Taxpayers are at risk for future tax increases if too much of the $2.3 billion in unanticipated windfall revenue is committed to spending. Obligating this revenue spike for ongoing programs will raise the state spending base to levels that cannot be sustained over a multi-year economic cycle. In the next economic downturn, state budget obligations will force a deficit, and there will be pressure to raise taxes.

Learn from the Past.

During the late 1980s, state general fund spending grew at an average rate of 7.7 percent. If each year's budget had merely grown at that average rate, instead of allowing large spending increases in revenue-growth years, enough surplus would have accumulated to avoid tax increases of 1991-92.

Do Not Bite the Hand that Feeds the Economy.

"Unemployment reforms" adopted by the Legislature's welfare reform conference committee would create a new welfare safety net inside the unemployment insurance program. These "reforms" would cost employers $1 billion per year in the name of saving perhaps $200 million in welfare costs. This is not only a bad deal, it is also a stealth tax increase which simply shifts a general fund burden to employers.

Avoid New Tax Authority for Local Governments.

Particularly in the area of Internet and other technology advances, California is positioned to be a world leader. It is critical that policy makers work to prevent tax problems for this emerging industry and the new economic activity it will generate.

Continue to Seek a Competitive Tax Structure.

Tax burden is an important factor determining California's competitiveness, and is key to attracting investment and jobs. Policy makers should take this opportunity to make progress in this area.

The business community's priorities for tax relief are listed below. We recognize that the new revenues are not enough to fund all of these reductions. We recommend, however, that tax relief be selected from this menu:

• Bank and corporation tax rate reduction. AB 479 (Pringle) is a 10 percent reduction over two years.
• Research and development tax credit. AB 1356 (Figueroa), AB 1067 (Cunneen), and AB 1499 (Caldera) conform to the federal credit.
• Net operating loss carryforward. AB 724 (Lempert) conforms to 100 percent of the federal NOL.
• Subchapter S Corporations. AB 203 (Takasugi) and SB 5 (Lockyer) conform to 1996 federal changes.
• Elective combined reporting. AB 417 (Davis) provides a binding option to file a combined report of affiliate companies.
• Minimum franchise tax reduction. SB 890 (O'Connell) and AB 8 (Leach) reduce or eliminate this tax for new companies.
• Manufacturers' investment credit (MIC) absorption. AB 539 (Firestone and Lempert) and AB 648 (Kaloogian) allow more equitable use of the MIC credit.
• Personal income tax reduction, across the board.

Besides those suggestions for tax relief, the business community recommends allocating some of the unanticipated revenue to capital improvements to meet education, transportation and public safety needs.

Repayment of the $1.36 billion due CalPERS, the Public Employee Retirement System, as a result of the recent court edict, can safely be spread over five years, to the year 2002. Full repayment in the 1997-98 budget year would absorb all of the discretionary revenue.

In the 1997-98 budget, policy makers have opportunity, as a result of the improved economy, to stimulate future investment in this state. Given the tasks facing state government, of creating jobs for welfare recipients, replacing inadequate and outdated infrastructure, and improving education opportunities, we believe our taxing and spending priorities will advance the cause of all Californians.