Tax breaks in the cross hairs

Battle is joined over business tax breaks
By Michael Gardner
San Diego Union-Tribune SACRAMENTO BUREAU
August 10, 2010

A battle is brewing over proposals to delay or repeal three corporate tax incentives:

Single sales factor: Allows selected multistate corporations, such as those in the biotech and high-tech sectors, to choose to have their corporate income taxes based solely on sales within the state starting in 2011. This policy is used in various forms in a number of other states.

Current law bases corporate income taxes on a percentage of sales, payroll and property.

Value: $1.1 billion.

Net operating loss: Two parts of this tax code section are included. The first allows businesses that make a profit one year to reduce their tax liability by writing off losses that go back up to two years. For example, a business could deduct a 2011 loss against a 2009 profit by amending its return.

The second extends the number of years companies have to carry losses forward, to 20 from 10 years. This allows companies with little immediate profit potential to pursue long-term projects knowing early, heavy losses can be recouped when balanced out against eventual profits from breakthroughs years down the road.

Value: $100 million.

Tax credit sharing: Allows a business entity to transfer tax credits to one of its related companies all within the same group. For example, a California-based company can earn a research and development tax credit for a new high-tech product. If that company earns more tax credits than it owes the state, it can spread some of those credits to other companies within its group, such as the business arm that makes the sale.

Value: $100 million.

Value source: Legislative Analyst’s Office.

Proposition 24 on the November ballot would repeal a series of tax benefits for California corporations that were set to begin taking effect next year.

Pro: Lost tax revenue will magnify cuts to education and social services, which threaten the jobs of teachers and providers of child care and health care for the poor. Large business is the primary beneficiary.

Con: High tax rates are a major contributor to California’s job losses and threaten to slow recovery. Without the incentives, more companies will shrink or move to states that offer better tax incentives.

SACRAMENTO — Battles over tax breaks for businesses will be waged on two fronts this year, in the Capitol and at the ballot box.

A campaign is under way to repeal or suspend an estimated $1.3 billion annually in promised tax credits for businesses approved as part of past budget compromises. That money has become an attractive target given another year of gaping deficits, this one $19 billion.

Powerful opposing interests, from the California Chamber of Commerce to the California Teachers Association, are immersed in the legislative budget negotiations over the tax breaks with eyes cast toward the November election.

That’s when voters will decide Proposition 24, an initiative sponsored by the teachers association that would permanently repeal the pro-business tax policies.

The San Diego County life-science and high-tech industries have been eagerly anticipating the tax benefits, which are scheduled to begin taking effect over the next two years. They argue the incentives are needed to create jobs and support emerging technologies in California.

But teachers, social services advocates and their allies say the more immediate need is to use that money to soften budget cuts to schools, health care and other services.

The experience of Genentech , a large biotech company with a plant in Oceanside, underscores the need for the tax credits, according to supporters. Four years ago, frustrated with California’s tax laws, Genentech expanded in Oregon, bringing a $400 million facility and 300 jobs to Hillsboro despite having available land in California. One influencing factor: Oregon offered some of the same tax breaks California didn’t have at the time and may now repeal.

“California’s tax structure didn’t support in-state growth,” said Caroline Pecquet, a Genentech spokeswoman. The company opposes Proposition 24, saying “the tax reforms that would be revoked are “important economic incentives that support job growth and encourage innovative companies like Genentech to make investments and expand operations.”

Jim Groth, an elementary school teacher in Chula Vista, said those policies favor larger companies with no guarantee of a return to the state.

“They get the tax breaks but they don’t have to create or protect any jobs,” said Groth, who is also a representative of the California Teachers Association. “They can continue to outsource outside of California or outside the U.S.”

He said that deep budget cuts are costing “real jobs” now, particularly in schools, local governments and among those who provide health care and child care services for the poor...