BUDGET

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Tucked away in the massive $77 billion state budget expected to be signed by Gov. Pete Wilson this week is a package of tax breaks for business.

But before businesses can begin cheering, there is one catch: the tax breaks $52 million for the current 1998-99 fiscal year and up to $103 million by the year 2002-03 are contingent upon the failure of an initiative on the Nov. 3 ballot.

The initiative, known as Proposition 7, is sponsored by the Planning and Conservation League, a statewide environmental lobbying group. It would set aside $218 million a year for five years for businesses to claim as tax credits when they convert to less-polluting technologies.

The move to link the two measures was initiated by Senate President Pro-Tem. John Burton, D-San Francisco, and agreed to in the closed-door negotiations between the “Big Five” (the leaders of the state Legislature and Wilson) earlier this month.

Burton said last week that allowing both measures to go into effect would deprive the state of much-needed revenue for other priorities, such as education spending and funding for local governments.

Nonetheless, linking two such disparate measures is highly unusual, and it caught the state’s major business groups off guard. It also puts business in a difficult position: Either push to defeat what by all appearances is a popular initiative, or forego the tax credits and hope they reappear next year.

“This is another absurd twist in an absurd process,” said Jack Stewart, president of the California Manufacturers Association, which lobbied at the last minute against the linkage. “It just goes to show, that, contrary to what many people might think, we do not control the governor or the Republican leadership. John Burton came up with this idea and was able to sell it to the governor and the other three people in the room.”

A spokesman for Wilson said the governor agreed to couple the tax credit package with the initiative as part the agreement that delivers tax cuts for Californians.

“There were many priorities among all the parties: the governor wanted deep cuts in the vehicle license fee, while some in the Legislature wanted more money for education, dependent care and a host of other things,” said H.D. Palmer, assistant director for the Department of Finance. “This is what was agreed to. It means that individuals in the business community are going to have to choose between the tax credits in the initiative and the tax cuts approved by the Legislature. They are going to have to make a judgment, as will the people of California.”

The CMA and the California Chamber of Commerce plan to support a last-minute effort led by Assemblyman Jim Cunneen, a Republican representing Silicon Valley, to decouple the tax credit package from the initiative. Cunneen said he wants the bicameral Conference Committee on Taxation to reconvene later this month to reconsider the issue; he said he has already talked to committee member Assemblyman Wally Knox, D-Los Angeles.

Cunneen said he supported both the initiative and the tax credits and believes linking the two will pit businesses against each other. But the business groups and even Cunneen admit that any new legislation would face long odds in the face of the agreement by the Big Five leaders. (In addition to Burton and Wilson, the Big Five consists of Assembly Speaker Antonio Villaraigosa, D-Los Angeles, Assembly Republican Leader Bill Leonard, R-Upland, and Senate Republican Leader Ross Johnson, R-Irvine.)

At stake is a package of 10 tax-credit bills targeted at specific industries or types of employers. Among the bills: a measure that reduces the minimum corporate tax from $800 to $300 in the first year of business; a manufacturing tax credit for software developers; a research-and-development tax credit; and an exemption from the 5 percent state sales tax on equipment purchased by movie/video production and other post-production services.

In the current fiscal year, which began on July 1, the tax credits are expected to deprive the state of $52 million; in the second year, $88 million less is expected to flow into state coffers. By the fifth year (2002-03), the total amount of the tax credits increases to $103 million.

Burton, speaking at a press conference following last week’s agreement among the Big Five, said he supported this package. But, when combined with the $218 million a year that Proposition 7 is projected to cost the state if it passes, it would deprive the state of too much revenue, he said.

“If we put that $218 million a year on top of what we are doing (in tax credits for business), instead of a $3.6 billion tax cut, it would be God knows what,” Burton told reporters. “Our main concern was the level of the hit on the general fund as it would affect future spending for public education, local government and a host of other programs.”

Asked if the linkage would generate opposition to Proposition 7, Burton responded: “I couldn’t care less. I think Proposition 7 is a hell of an idea for the guy who makes money by putting it on the ballot. We think our tax cuts are better for the state’s economic growth and health.”

Planning and Conservation League Executive Director Jerry Meral said Burton’s move was “a blatant attempt to create opposition to the initiative. It makes people not even directly involved in the initiative hostages to the process. I cannot understand why he is opposed to the initiative, especially when it would benefit so many people and businesses in his own district,” he said.

Meral said that before the linkage, there was no business opposition to the measure. He said that might change if businesses decide the targeted tax breaks better suit their interests.

So far, both the state chamber and the California Manufacturers Association have remained neutral on the initiative. Both organizations plan to revisit their positions on the measure in the next four weeks.

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