California also gives hefty tax breaks to business

Dan Walters

Columnist, CALmatters


There’s much political complaining in California these days over congressional plans to overhaul the nation’s tax system in a way that would cost many Californians, particularly those in high tax brackets, more money.

The federal plans are still being finalized – if they can be – and are aimed at raising enough money to pay for corporate tax cuts that Republican sponsors say are needed to improve the economy by stimulating investment.

The most controversial proposals would eliminate, or at least reduce, personal income tax deductions for state and local taxes, thereby increasing tax payments to Washington.

The proposal would hit taxpayers in high-tax states such a California the hardest and the opposition brands it as unfair to tap individual taxpayers so that corporate taxes can be reduced.

However, one should point out that California itself does much the same thing for the same supposed reasons through a variety of corporate tax loopholes. The revenue lost in what are officially dubbed “tax expenditures” must be made up with sales and/or income taxes on individual Californians.

Some of those loopholes are industry- or even company-specific, such as the three-decade-old sales tax exemption for custom computer software. While ordinary consumers must pay sales taxes on software for home or small business computers, corporations ordering custom software don’t have to pay those taxes, a loophole worth tens of millions of dollars each year.

Other tax breaks are more generalized, such as the sales tax exemption for corporate research projects that was extended last summer as part of the deal to gain legislative approval of the cap-and-trade program limiting greenhouse gas emissions.

The Legislative Analyst’s Office, which advises the Legislature on financial matters, recently took a critical look at one of the state’s major corporate tax subsidies called California Competes.

The program, created in 2013 to more or less replace an old “enterprise zone” program, grants tax breaks to particular businesses which promise to meet investment and/or job creation targets. It’s managed by Gov. Jerry Brown’s Office of Business and Economic Development, which goes by the catchy name of “GO-Biz.”

Up to $780 million in subsidies are available, topping out at $200 million a year, and are supposedly awarded on a purely meritorious basis.

The LAO didn’t much like what it found when it examined the program’s records.

It found that 35 percent of the awards, representing 15 percent of the dollar value, went to businesses that sold goods and services nearby, therefore generating little or no gain in economic activity for the state as a whole.

Another 65 percent of the awards (and 85 percent of the money) went to firms that marketed both in and out of the state, but the LAO said it was impossible to determine whether the subsidies had any net positive effect.

Bottom line: A lot of taxpayer money is being handed to businesses, without any objective evidence that it’s doing anything other than improve their own bottom lines.

The LAO concludes that California Competes should be dropped in favor of “broad-based tax relief…for all businesses,” rather than have the state try to pick winners.

Will that happen? Almost certainly not.

Politicians love to profess that they are doing something positive about the economy; to point to California Competes, regulatory exemptions and other goodies as evidence of their intent, and – most of all – to show up for groundbreakings and get their picture taken.

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