Executives at Felbro Inc., a manufacturer of point-of-purchase displays located southeast of downtown Los Angeles, are keeping a wary eye on Sacramento these days.
That's because Sacramento politicians from Gov. Arnold Schwarzenegger on down are now talking about scaling back or eliminating tax breaks for businesses to plug a gaping $16 billion budget hole.
These tax breaks are giveaways to some, but for Felbro they've offset the cost of hiring dozens of employees and spending hundreds of thousands of dollars on research and development.
"We've stayed here because of these tax credits," said Felbro vice president Howard Feldner. "Remove those tax credits and we're going to take much more seriously the offers we have coming in every month from states like Iowa and Nevada to locate facilities there."
Felbro could have some company.
Thousands of local companies have used state tax credits to move into enterprise zones and hire local workers, or to purchase manufacturing equipment. They've also used tax credits to offset research and development costs or reduce taxes years after operating losses.
Statewide, these and several other tax credit programs cost the state about $1 billion a year, a tempting target for budget savings. Indeed, last month, state Legislative Analyst Elizabeth Hill singled out these "tax expenditure" programs for cuts in her proposal to bring the state budget into balance.
In most years, proposals to eliminate corporate tax breaks meet with stiff opposition from business groups and Republican elected officials who view them as tax increases, and the proposals don't get far. But in a speech late last month Gov. Arnold Schwarzenegger told a gathering at Town Hall Los Angeles that he would like to bring in as much as $2.5 billion additional dollars by closing "tax loopholes."
"Even though I'm a Republican, I'm a big believer that when we have a financial crisis like this we all should chip in. This is why I totally agree with the Legislative Analyst's Office when she says that we should look at tax loopholes," Schwarzenegger said in response to a question about the lack of a sales tax on yachts and recreational vehicles. "This is $2.5 billion we can give straight to education. I am totally for that."
Tax breaks or loopholes?
Schwarzenegger's comments were greeted with dismay from Republican lawmakers and anti-tax advocates, who accused Schwarzenegger of backing away from the "no new taxes" pledge he campaigned on during the 2003 recall election.
"If you take away a tax credit, that's a tax increase," said Senate Minority Leader Richard Ackerman on the radio program "Which Way, L.A.?" last week.
The Fullerton Republican said he would oppose reductions or eliminations of tax credits. He also said he opposed broadening the state sales tax to services like accounting and the legal profession, as outgoing Senate president Don Perata, D-Oakland, proposed last week.
The state's major business groups are also opposed to reducing or phasing out corporate tax breaks. They argue that doing so would be counterproductive, since businesses would decide not to expand at all or to expand elsewhere.
"The most important criteria to consider in evaluating tax credits and competing demands for resources is job growth and investment," said Kyla Christoffersen, policy advocate with CalChamber, formerly the California Chamber of Commerce. "Stimulating the economy is the only way California can generate the tax revenues it needs to run the state over the long term."
What's more, business lobbyists say, the state offers few substantial tax credits for companies to offset the high cost of doing business, particularly after the state eliminated the manufacturer's investment credit during the last budget crisis four years ago.
"California manufacturers are already saddled with costs that run 23 percent above the national average, which helps explain why we've lost more than 400,000 manufacturing jobs since 2001," said Gino diCaro, spokesman for the California Manufacturers and Technology Association. "These jobs are moving to more competitive states. We need the research and development tax credits to keep even more jobs from moving out of state.
According to Legislative Analyst Hill, limiting the research and development tax credit to two-thirds of a company's annual research and development expenditures would save the state $335 million in the next fiscal year beginning July 1.
Hill also proposed limiting another lucrative tax benefit: net operating loss deductions. The state allows businesses that experience net operating losses to "carry them forward" on their books and deduct them in future years when they are in the black. By limiting those deductions to 50 percent of a business' net income in the 2008 tax year, she estimated the state would gain $330 million in revenues for the 2008-09 fiscal year.
Another big revenue generator for the state would be to eliminate sales tax exemptions on the sale of manufacturing equipment, which Hill said would bring in about $145 million a year.
However, the California Manufacturers and Technology Association's diCaro said that scrapping this tax credit would discourage manufacturers from setting up shop or expanding here, since only a handful of states still tax manufacturing equipment.
Finally, phasing out the controversial enterprise zone program would save the state $100 million in the 2008-09 fiscal year in hiring tax credits. Hill noted that the enterprise zone program in which companies locating in so-called blighted areas can get tax credits of up to $36,000 for each eligible person hired from within the zone has been criticized in some quarters as having little effect in stimulating the economy
But economic development officials dispute this claim, saying the enterprise zone program is the biggest single tool the state has in its arsenal to keep businesses from expanding or relocating to other states.
"Eliminating the enterprise zone program is one of the most business-unfriendly things the state could do," said Carrie Rogers, vice president of business assistance and development for the Los Angeles County Economic Development Corp. "The state is one of the most expensive places to do business, and we only have a couple of programs that help offset these costs. We're still the perfect hunting ground for other states to poach our businesses."
The downside for California of phasing out the enterprise zone program is illustrated by what has taken place over the past couple years at Gardena-based Swift-Cor Aerospace, which makes structural aerospace components for commercial and military customers.
Earlier this decade, Swift-Cor hired dozens of workers through the enterprise zone program, receiving several hundred thousand dollars worth of hiring credits that it could apply against its state tax tab. The company employs a total of 150 workers here.
But the enterprise zone Swift-Cor was located in expired in 2006. Chief executive Sam Longo Jr. said the expiration of the enterprise zone tax credits figured prominently in the company's decision that year to open up a plant in Wichita, Kan. Another key factor: Kansas offered up its own enterprise zone benefits, including a nearly identical hiring tax credit.
"When we looked at the L.A. County enterprise zone expiring and saw a very similar program that Kansas was making available to us, that cinched the decision for us to open that Wichita plant," Longo said. "These credits are crucial because they allow us to keep our costs in check."
Longo said Swift-Cor also has been using California's research and development tax credits. Limiting this tax benefit wouldn't force Swift-Cor to close up shop here, but "it's one more thing that enters the equation when we look at expanding here or in Wichita." He noted that the company is now close to signing a lease to double its space in Wichita, which would allow the company to add substantially to the 60 employees already there. No expansions are planned at the Gardena facility.
At the other end of the county, in Lancaster, Lance Camper Manufacturing Corp. has hired about 1,500 employees through the enterprise zone program over the last 10 years. The company now employs about 300 people making campers that attach to the back of trucks.
"Manufacturing is under huge pressure here in California, with huge bills, high labor costs and regulations," said Jack Cole, chief executive of Lance Camper. "Given this, I sincerely hope that the governor was not saying that incentives to create jobs are tax loopholes for businesses."
Even though the tax credits are now due to end in three or four years, Cole said he was working with Antelope Valley economic development officials to push for a five-year extension. If the program were to be phased out, Cole said he would probably do less hiring. He also complained it would be unfair to companies that had recently been lured to the region by the tax incentives.
"You can't just lure companies here and then, right after they put down roots here, take away the incentives before they were scheduled to end," he said.
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