Hundreds of businesses have begun lining up to defend tax breaks under attack by a labor-sponsored initiative that recently qualified for the November ballot.
Proposition 24, backed by the state teachers union, would repeal three tax changes that will save business an estimated $1.7 billion a year. State tax regulators estimate that about 120,000 businesses statewide could lose these breaks if the initiative passes.
Nearly every major statewide business organization and dozens of local chambers of commerce have joined a coalition called Stop the Jobs Tax Initiative. Among the more prominent local companies are Burbank-based Walt Disney Co. and Amgen Inc. of Thousand Oaks.
But smaller companies also see big stakes in the issue. At Gardena furniture manufacturer Cambridge of California, for example, owner Ben Nielsen said he might shut down if he loses the tax breaks that were passed by the Legislature over the past two years.
“We’re barely surviving now as it is, with the economy as tough as it is and the foreign competition,” Nielsen said. “Those tax breaks were our hope for the future. If they hadn’t been enacted, I would already have closed my doors. Take them away, and I’ll probably have to shut down and throw 27 people out of work.”
The coalition already has begun raising the tens of millions of dollars needed to run an opposition campaign. The members also are mounting a lobbying effort to prevent passage of bills delaying the tax breaks.
But raising the money may be a daunting task. Business pocketbooks have been drained by the recession, and there are several other propositions on the November ballot deemed crucial to businesses. Those include a measure postponing the state’s greenhouse gas reduction law and another initiative requiring a two-thirds vote of the Legislature to raise fees on business.
“This will be one of the most expensive elections for business ever,” said Gary Toebben, chief executive of the Los Angeles Area Chamber of Commerce.
But Toebben said the tax breaks initiative may get special attention nevertheless.
“Businesses are very angry with this initiative and the way it’s been described by its proponents as ‘closing tax loopholes,’ ” he said. “They’re angry enough that I guarantee you they will open their wallets to defeat this.”
Proposition 24 would repeal three business tax breaks that the Legislature passed during budget negotiations in late 2008 and early 2009, just as the economy plunged into a deep recession.
The tax breaks, which would all kick in starting in 2011, include:
• Allowing businesses to shift operating losses to prior tax years when they made money so that they can apply for retroactive refunds. That break also extends the length of time a business can shift operating losses into future tax years from 10 years to 20.
• Allowing corporations to share tax credits with subsidiaries, such as their affiliated research and development companies.
• Imposing only California sales tax on businesses that have operations in many states. They now pay taxes on payroll, property and sales in the state.
When these tax break were passed, businesses and business organizations said they would make accounting easier because the taxes would be more compatible with federal tax code. They also said the tax breaks would help make California more competitive with two dozen other states that have similar tax provisions.
Separate from the initiative, Democratic state lawmakers are citing the budget deficit and want to delay the tax breaks for at least a year. Business organizations have said they oppose any postponement.
Public employee unions – led by the California Teachers Association – blasted the tax breaks, saying they would deprive the state of nearly $2 billion a year in revenues as California faces a budget deficit topping $20 billion and is preparing cuts to school funding. The unions immediately began a campaign to put a measure on the ballot to repeal the tax breaks, which they termed “corporate tax loopholes.”
In March, the CTA submitted more than 800,000 signatures to place the repeal measure on the November ballot.
“With our schools being slashed by $17 billion over the past two years and 26,000 teachers potentially facing layoff, now is not the time for the state to be giving tax breaks to large corporations and oil companies,” CTA President David Sanchez said in a press conference at the time.
Business leaders, however, say the tax breaks are not just for a handful of large corporations and oil companies.
“I’ve talked with many of my members and they were planning to use the net operating loss and tax credit sharing provisions,” said Bill LaMarr, executive director of the Anaheim-based California Small Business Alliance, which has a membership of about a dozen trade associations representing 30,000 small businesses.
LaMarr said the tax credit sharing provision would help many of the alliance’s high-tech companies that have research and development subsidiaries. Under current law, research and development tax credits must stay within the subsidiary and cannot be transferred to the parent company even though the parent actually pays most of the taxes.
Loss provision
But the most far-reaching tax credit is the one for net operating losses, since it could apply to any company that has an operating loss in 2011 or any year thereafter.
One small business owner who said he may be helped by the net operating loss provision is Misha Georgevitch, owner of So Cal Surveyors of Simi Valley, a land surveying company.
Georgevitch said his business, which launched in 2006, has been struggling due to the real estate downturn. He laid off four of his eight employees and has refocused on public works projects.
“The market is very soft now and there’s no sign it’s going to turn around any time soon,” Georgevitch said. “I hope I don’t have to use the net operating loss provision, but if that tax incentive is taken away, I would seriously look at relocating to another part of the country and start over again there.”
Proposition 24 proponents said that the fears of small business owners like Georgevitch and Nielsen are overblown.
“This proposition doesn’t take away anything that businesses already have,” said campaign spokesman Richard Stapler. “California does have a hiring tax credit for small businesses which is not affected by the initiative.”
For larger businesses, though, the issue is whether to make investments, either through new facilities or expanding existing operations as the economy begins to recover.
“When these tax incentives were approved, businesses counted on them when making investment decisions,” said Greg Hines, lobbyist for the California Manufacturers and Technology Association. “When an initiative comes forward that threatens to take away something you had counted on, it adds to uncertainty and deters future investment. And that means the loss of potential jobs and revenues for the state.”
