Unitary Tax Change OKd by Conferees : Revised State Law Would Be of Help to Multinationals

A two-house conference committee gave unanimous approval Thursday to legislation changing the way California taxes multinational corporations, signaling the likely end to a high-stakes lobbying battle waged by some of the world’s largest businesses.

On a 6-0 vote, the committee sent the compromise legislation overhauling the state’s unitary tax system for showdown votes in the Senate and Assembly.

Sponsors of the bill say corporate taxes will be cut by $83 million under the proposal, a significant revenue loss for the state but substantially below the $600 million or more that earlier versions would have cost.

Corporate leaders say the unitary method is so unpopular that it discourages new business investment in California, one of only a handful of states that bases its bank and corporation tax on worldwide income.

Ready for a Change

The strong, bipartisan committee vote led to predictions that the Legislature is finally ready to change the unitary system after struggling for years to find a political solution to the vexing problem of changing 50-year-old corporate tax codes.

Unitary tax bills failed on the last day of each of the past two legislative sessions as domestic and foreign-based corporations employed high-powered lobbying campaigns to battle each other to a standoff.

Under the system now, the state bases its bank and corporation tax on a percentage of a corporation’s worldwide profits.

The unitary system was devised in the late 1930s to keep large corporate entities with numerous subsidiaries from shifting profits from one subsidiary to another, and thereby avoiding a tax altogether.

But foreign and domestic companies have challenged the tax for decades, first in the courts and then in the political arena, contending that it is unfair for the state to tax profits generated beyond the borders of the United States.

Picking Up Support

Gradually, the corporations have been picking up political support in their efforts to limit state taxing authority to business operations within the United States.

Gov. George Deukmejian has made changing the corporate tax codes one of his top priorities.

The bill, as it emerged from the committee, differs from Deukmejian’s unitary proposal in several key respects. For one thing, it contains a penalty on corporations that choose to get out from under the current unitary system--a so-called “election fee”--that is higher than one that the governor agreed to.

But Nancy Ordway, the Deukmejian Administration official who has been negotiating with tax writers on behalf of the governor, said that despite some differences, “We probably won’t stand in its way.”

Both Republican and Democratic lawmakers on the committee said they believe that the bill approved Thursday will pass both houses of the Legislature.

“My sense is that it will have a large vote in both houses in favor,” said Assemblyman John Vasconcellos (D-San Jose), who played a key role in helping defeat last year’s bill.

Vasconcellos called the bill “a fine compromise” that balances the competing interests of foreign and domestic corporations. “They gain vastly under the bill,” he said of both California and foreign-based firms.

Senate Republican Leader James W. Nielsen of Rohnert Park, another committee member, said: “I think it goes. It is the absolute best deal we could put together.”

Last year, unitary legislation was bottled up when an amendment was added at the last-minute to deny tax benefits to companies operating in South Africa. The move caused Deukmejian and the bill’s author, Sen. Alfred E. Alquist (D-San Jose) to withdraw their support.

The South Africa issue was removed from this year’s bill last week after Deukmejian agreed to support separate legislation dealing with the issue.

With the Legislature scheduled to adjourn next Friday and a vote on unitary not likely until midweek, lawmakers cautioned that the issue could get caught up in end-of-session politics. “The only thing that could keep it from passing is if it gets tied up with some other issue, and that is always possible,” said Nielsen.

Under the bill, companies would have the option of continuing under the current system or choosing a more limited method, one based solely on business operations within the United States.

Those choosing the latter method would have to pay the so-called “election fee”--0.03% of the value of their business receipts, property and payroll in California.

The fee would raise an estimated $38 million, earmarked for public works projects and special programs to promote California trade. That estimate assumes that about two-thirds of the foreign-based multinationals will opt for the new system of taxation.

The bill also calls for the state to close several corporate tax loopholes if Congress enacts the major tax reform package it is considering.

Lobbyists representing corporate interests said they generally were pleased with the bill, even though they do not like the penalty they will have to pay to get out from under the current system and some other features of the bill.

Yoshiaki Shibusawa, executive vice president of California First Bank, which has extensive dealings with the Japanese business community, said the unitary system has been “a major stumbling block” in attracting new investment to the state.

Denny Valentine, a lobbyist for the California Business Council, a group of powerful California and U.S. corporations that opposed last year’s bill on the grounds that it unfairly provided tax relief to foreign-based competitors, also hailed the legislation as a big step forward.

A major compromise in favor of domestic corporations was a provision that would allow them to protect from state tax up to 75% of the profits they generate from their own overseas operations. They had sought 100%.

Valentine said even though corporations didn’t get everything they want, they are willing to accept the bill and take their chances on amending it next year.