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Calif. Life-Sci Industry Dodges Two Bullets in Newly Passed Budget

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By Alex Philippidis

California's life-sciences industry dodged two bullets in the deal crafted by Gov. Arnold Schwarzenegger and state legislative leaders, which seeks to plug the state's $26.3 billion budget shortfall for this fiscal year.

The budget agreement, announced late Monday, retains two economic incentives sought by leaders and advocates in the life sciences and other industries: The deal keeps intact the 20-year duration life-sci companies can carry forward tax deductions on their net operating losses. The period doubles the original 10-year duration after the state government reached a compromise budget almost a year ago [BRN, Sept. 22, 2008].

Also left intact in the new budget will be the new single sales factor apportionment measure agreed to by Schwarzenegger and legislators last February, at the urging of life-sci and other business leaders [BRN, March 16]. The measure allows life-sci and other multi-state businesses to cut their corporate income taxes by changing how they determine the percentage of corporate income or “franchise” taxes they owe the state.

Starting Jan. 1, 2011, when the measure takes effect, that percentage would be based solely on their sales, rather than combining double-weighted sales with two other factors: the size of their payroll and the amount of property they own. By comparison, current law calculates each factor as a ratio of in-state activity to activity everywhere.

Democratic legislative leaders included a rollback of the single-sales factor in versions of the budget that passed the Assembly and state Senate, after state Senate President Pro Tem Darrell Steinberg endorsed the idea after a coalition of labor, health, and consumer advocates urged the repeal of that and other business tax breaks before any cuts to social programs were considered [BRN, June 19].

The retention of both tax breaks is a victory for Schwarzenegger and state Republicans, who had vowed not to raise taxes as part of a budget deal. The retention is also a victory for business leaders in the life sciences and other technologies, who argued the rollback would further chill what they consider to be the state's already frosty business climate.

Supporters of single-sales cited a study by Ernst & Young furnished by BayBio, the industry group for life-sciences employers based in the San Francisco Bay Area and northern California. According to the study, the measure is projected to generate 21,180 new jobs in California and more than $1.1 billion in state income during 2011 — numbers expected to rise to 37,529 new jobs and more than $3.3 billion in personal income by 2015.

"Pretty much everything was on the table, and they had to make a lot of very painful cuts. But we had many supporters for preserving both of those [tax incentive] agreements in the legislature," said Jimmy Jackson, vice president of public policy and communications for BIOCOM, the life-sci industry group based in San Diego. “The [Schwarzenegger] administration, to our knowledge, never put it on the table. So it was something we were very cognizant of, something that we were watching very carefully. I'm not sure that it was ever substantially in play."

The tax-break rollbacks had been sought by supporters of greater spending on social programs, who contended the incentives represented "loopholes" through which businesses dodged what the advocates have deemed a "fair" share of taxes.

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Supporters of the tax rollbacks cited a study issued in June by the California Budget Project, a nonprofit fiscal and policy analysis group that advocates greater state spending on programs intended to improve the economic and social well-being of low- and middle-income Californians. The study, To Have and Have Not, concluded that California cannot afford the cost of single sales factor apportionment, which they have projected as costing the state $260 million in its first year, FY 2011, and $1.5 billion by FY 2015. Those numbers reflect the projected tax savings of all businesses, not just those in the life sciences.

Single sales factor apportionment, the net operating loss carry-forward, and the transfer of tax credits among a family or combined reporting group of related corporations will cost the state a combined $8.7 billion in lost revenues through FY 2016, followed by annual losses to the state of "as much as $2.5 billion per year" each year thereafter, To Have and Have Not also concluded.

"At a time when tens of thousands of children are losing health coverage, thousands of students are being turned away from colleges and universities, if you really want to talk about shared sacrifice, it would be appropriate to rescind tax breaks that were granted at a time when the state clearly didn’t have the means to pay for them," Jean Ross, founding executive director of the California Budget Project, told BioRegion News on Wednesday.

"We don't think we're out of the woods yet. Given the state's ongoing fiscal problems, [rescinding single sales factor and NOL carry-forward extension] ought to be part of a budget agreement," Ross added.

Democratic legislative leaders — including Steinberg and Assembly Speaker Karen Bass (D-Los Angeles) — took comfort in prevailing over Schwarzenegger and Republicans in retaining the CalGrants college-aid program, which funds 118,000 students statewide studying at the state's two public university systems and its community college system. The governor had hoped to save $623 million over the 2010 and 2011 fiscal years by phasing out CalGrants.

But California's public community college system and two state university systems, the University of California and California State University, are set to lose more than $1 billion in combined funding — or $2.8 billion when retroactive FY 2009 cuts are included — while the state's community college system is projected to lose another $936 million.

CalState, which will see a $584 million cut in its state funding in FY 2010, responded by raising its fees for in-state students 20 percent, to $4,026 per year, and raising tuition for out-of-state students for the first time since 2004-05, by about 10 percent, to $11,170 per academic year.

In addition, CalState said in a statement, it will reduce enrollment by 40,000 students over the next two years, closed spring 2010 admissions completely, and implemented an employee furlough program requiring management and non-represented employees to be furloughed two days per month beginning on Aug. 1. If all employees join in, CalState projects it can save $275 million.

UC, which has an $813 million budget hole to fill in the 2010 fiscal year, will require faculty and staff to take between 11 and 26 furlough days at a salary reduction of 4 to 10 percent, with higher earners being forced to take more furlough days and steeper pay cuts.

Also, the university announced, most campuses are deferring at least half of their planned faculty hires. UC cited its Berkeley campus, which will slash faculty recruitment from its usual complement of about 100 positions a year to 10. UC has already laid off 724 campus staff members systemwide, and has warned that additional job cuts are coming.

Cuts like these could reshape biotech and other life-sci programs at the public universities and colleges — traditionally viewed by industry and government leaders alike as a key factor in the growth of the San Francisco and San Diego bioclusters.

But it's too early at this point to know how much of a toll the cuts will take, Jackson cautioned: "I think those are going to be decisions that are made at the university offices level."

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