State Budget Reserves Deficit Pain for Future Years

By HOWARD FINE

Staff Reporter

The $99 billion state budget signed into law last week by Gov. Gray Davis put off the most serious decisions until next year and produced only limited relief for California companies.

Among business lobbyists, there’s particular concern over what actions the Legislature and governor will have to take next year to close a budget gap already projected at more than $10 billion.

“All this budget does is buy time to make real cuts and impose real taxes next year,” said Fred Main, senior vice president of the California Chamber of Commerce.

The greatest worry to business is the prospect of cuts in education and local government. On the revenue side, there’s concern over the possibility of an increase in the top-bracket income tax rate which is paid by many small companies and the imposition of other taxes and fees. State Sen. President John Burton proposed increasing the top tax rate, but Republicans and moderate Democrats beat back that idea.

“The Republicans held out for a strong bargain and that helped tremendously,” Main said.

Turning back Davis’ proposal to repeal recent cuts in the car tax was considered a major development. Companies with car and truck fleets pay one-third of the vehicle license fees in the state.

For the average car owner, the original Davis budget would have increased the fee from to $148 from $64; now, the $64 fee is preserved. For business owners with large fleets, this will result in saving hundreds of thousands of dollars a year in fees that would have been paid under the original Davis budget.

The Republican caucus also pushed for a long-sought goal: a 100 percent net operating loss carry forward.

Currently, if a business posts losses in a given year, the net operating loss carry forward allows that business to forego paying any taxes that year and to lessen its tax bill by 60 percent of the loss over 10 years. So, for example, if a business posts $100,000 in annual losses, it doesn’t have to pay any taxes this year and can reduce its taxable income by $6,000 for each of the next 10 years.

Under the budget signed by Davis, there would be no such tax credit for the 2002 and 2003 calendar years. Businesses posting operating losses will now have to pay taxes on revenues for those years.

But starting in 2004, the net operating loss carry forward goes to 100 percent. So if a business posts $100,000 in losses in 2004, it won’t have to pay taxes for 2004 and it could reduce its taxable income by $10,000 for each of the following 10 years, so that the entire 2004 loss is credited over that 10-year period.

Business advocates argue that the tax credit’s two-year suspension will be of no help to struggling firms.

“What happens three or four years from now is of little concern to businesses that can’t make ends meet today and will have to close their doors rather than pay taxes on their losses,” said Dorothy Rothrock, vice president of government relations for the California Manufacturers & Technology Association.