Business incentive bill awaits governor's signature.

One state official calls measure best in quite some time

Trumpeting a new business-friendly appraoch to taxes, California lawmakers have handed Gov. Pete Wilson an omnibus business-incentive bill they passed on Sept. 8. The governor has until October 8 to sign off on it, and announced his intent to do so in a apperance in Los Angeles last week.

St [e Tr de and Commerce Underscretary Loren Kaye told reporters the measure is the best legislation he has seen in a long time. And he defended it ag inst criticism that the bill represents more a reduction of disincentives than a creation of actual incentives.

"You don't have to bride businesses to do business in the state," insisted Kaye, "you just have to have a level playing field."

Included in the measure are:

* a 6 percent tax credit (or sales tax holiday) for manufacturing equipment;

* halved taxable capital gains on the sale of certain small business stock;

* a cut in the tax rate for Subchapter S corporations from 2.5 to 1.5 percent, and;

* permanent research and development tax credits.

In addition, the legislation would overhaul the unitary tax methodology the state has used to assess the taxes multinational corporations owe the state. The current methodology determines taxable income based on how much of a multinational's global payroll, property and sales is generated in California.

An alternative tax procedure that is presently available, the water's -edge method, assesses taxable income based on the proportion of the U.S. payroll, poperty and sales the multinational generations in California.

Currently, if a multinational elects to use the water's-edge method, it must pay an "election fee" and submit extensive spreadsheets to the State Franchise Tax Board.

The omnibus business-incentive bill would repeal the requirement that multinationals pay an election fee and submit disclosure spreadsheets when opting for the water's--edge method. Firms with more than $200 million in assets would have to submit a list of corporate affiliates instead.

The legislation would also eliminate the Franchise Tax Board's ability to turn down a water's-edge election, a prerogative that had not been exercised to date.

According to Kaye, the unitary tax provisions were necessary to remove a major business disincentive, as well as "the specter of BritEsh relationation and a tremendous lawsuit."

The lawsuit he referred to was filed in February by Britain's Bacrclays plc. Barclays petitioned the U.S. Supreme Cour[ of review California's unitary tax, claiming it violates the U.S. Constitution's provisions for due process and commerce.

At stake are $4 billion in projected tax liabilities if Barclays wins the case,f according to State Franchise Tax Board estimates. In June, the British government threatened to revoke a tax credit to U.S.-based companies doing business in Britain if the unitary tax matter is not resolved to its satisfaction by year end.

The retaliation would have cost U.S. companies "well over $1 billion," according to an estimate published by the stte's Trade and Commerce Agency.

State legislators have said that they believe passing the bill would enable president Clinton to file a neutral brief with the Supreme Court reg rding the Barclays suit, helping the state's case. The brief is expected to be filed later this month.

The state Attorney General will also be filing a supplemental brief advising the Supreme Court of the legislative action in California, said Ben Miller, attorney for the State Franchise Tax Board.

A letter dated Setpember 14 sent by the British Chancellor of the Exchequer to U.S. Treasure Secretary Lloyd Bentsen indicated the british will defer retailatory action - at least for now.

The letter noted that Britain "will retailate only if it is found that the legislation is being applied in a way which exposes U.K. owned companies to damage from taxation."

In the meantime, the state Franchise Tax Board estimated that changes to the unitary tax law will shrink future state tax revenues by $75 million in the fiscal year ending June 30, 1996, when all changes would be effective.

To offset the anticipa[ed loss, the omnibus bill will reduce corporate meal and entertainment tax deductions to 50 percent from 80 percent, in conformity with the new federal guidelines.

Despite t'is, the overall effect of the bill would cut tax revenues by $400 million during the fiscal year ending June 30, 1996, according to Trade and Commerce's Kaye, citing a Franchise Tax Board estimate.

Based on a scenario in which business activity would pick up in reaction to the bill's incentives, Kaye said the net fiscal impact of the omnibus bill would be to break even in there to four years, then pay the state back by generating higher revenues after that. If this upbeat scenario fails to pan out, he said, "to the extent there is a revenue shortfall, it will be made up by spending cuts."