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Key Calif. State Senator Seeks to Eliminate Life-Sci Friendly Tax Break to Ease Budget Shortfall

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This is an updated version of a report that was originally published on June 16.

Citing California's need to plug its staggering $24 billion shortfall for the fiscal year that starts July 1, state Senate President Pro Tem Darrell Steinberg has called for rolling back a cut in corporate income taxes set to take effect the following fiscal year — a tax break that life-sciences leaders and advocates won as part of the state budget crafted this past winter [BRN, March 16].

Steinberg (D-Sacramento) is siding with a coalition of labor, health, and consumer advocates that has asked the state to repeal the new single sales factor apportionment measure before cutting spending on social programs.

The measure allows companies to determine the percentage of corporate income or "franchise" taxes they owe the state 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. Current law calculates each factor as a ratio of in-state activity to activity everywhere.

Steinberg's stance, made public in interviews with state-based news outlets, confirmed days of talk in regional life-science and legislative circles that a single-source rollback attempt was in the works [BRN, June 5], and followed the coalition's sending a letter June 11 to leaders of California's Assembly and state Senate demanding the end of the tax break.

"Fairness dictates that everyone shares in the pain. And that includes some of the world's wealthiest corporations. Before considering additional cuts to programs Californians care so deeply about, we ask that you shut down these corporate tax giveaways," the coalition wrote.

The life sciences industry has joined with California's entertainment and high-tech industries to beat back any rollback of single sales factor apportionment, the head of the life-sci industry group for the San Francisco Bay Area and northern California told BioRegion News.

"At a time when companies are more carefully than ever scrutinizing where these jobs will be created, and how these investments might be made, California has prospects for capturing investment, and this would be a real unfortunate move to make," Matthew Gardner, president and CEO of BayBio, said in a June 12 interview. "It would truly be one of the most unfortunate things that lawmakers could do, after having begun to address some long-term issues with the business climate in California."

Steinberg and the coalition argue that the state cannot afford the cost of single sales factor apportionment, which they have projected at $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.

The projections on savings to businesses from single-source come from To Have and Have Not, a report critical of single sales factor apportionment and other business tax incentives, released June 3 by the nonprofit California Budget Project. The report did not identify the life-sci businesses that would benefit from the tax break, saying that California state law prohibits disclosure of their names.

But the report did include data from the state Franchise Tax Board concluding that:

• Nine corporations, 0.0001 percent of California corporations, would receive combined tax cuts of more than $20 million in FY 2014, accounting for nearly one-third of the total cost of single sales factor apportionment — an average per firm of $33.1 million.

• An additional 13 corporations' tax bills would be reduced by between $10 million and $20 million in FY 2014.

• Another 152 corporations would receive tax cuts of $1 million or more in FY 2014, or 0.02 percent of all California corporations – at a $768 million cost to the state. The 152 include 28 utility corporations, which will receive FY '14 tax cuts averaging $1.7 million per firm, the highest average of any industry studied by CBP.

The report did not list a separate life sciences or biotech category, but did list seven other industry categories — information technology, manufacturing, finance/insurance, retail and wholesale trade, transportation, services, and real estate.

Single sales factor apportionment was one of three business tax breaks studied in the report; the other two were the transfer of tax credits among a family or combined reporting group of related corporations; and the state's doubling of the amount of time life-science and other tech companies can carry forward tax deductions on their net operating losses, from 10 to 20 years. The California Budget Project concluded that all three would 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.

Jean Ross, founding executive director of the California Budget Project, told BRN Tuesday that the fact single source sales apportionment would not take effect until next summer was not a reason to hold off on the rollback now.

"As you look at the long-term budget forecasts, the ink gets redder, and redder, and redder as we move out into the future," Ross said in an interview. "And I think there's also a very critical statement about values and priorities. We are slashing education funding, slashing payments to sfaety-net hospitals, looking at changes that will potentially throw tens of thousands, if not hundreds of thousands of people, off of health coverage. It's just inappropriate to provide tens of millions of dollars a year in tax breaks to individual companies in a state that's contemplating budget reductions such as those on the table in California."

Ross cited two proposed budget cuts — plans to phase out the CalGrants college-aid program, which would save $623 million over the 2010 and 2011 fiscal years, but would affect 118,000 students statewide studying at the state's two public university systems and its community college system; as well as the 20-percent across-the-board funding reductions contemplated for the campuses of the University of California system. At UC Berkeley, the 8 percent, or $67 million, campus-wide cut first projected by administrators has ballooned, to $94 million or 11 percent as of last month, when voters rejected five propositions that underpinned the budget agreement officials reached last February, and $145 million at present, after Schwarzenegger responded to the defeat by proposing additional budget cuts.

"If Berkeley starts cutting back funding for biochemistry programs, and for biology programs, what's that going to do to biotech in California?" Ross rhetorically asked. "If UC San Diego cuts back funding for life sciences by 20 percent, what does that mean for the next generation of scientists that would go to work in biotech in California? If we take CalGrants away from students, eliminating financial aid for young people who want to be the next generation of scientists and engineers, what does that mean to biotech firms?"

Supporters of single sales factor apportionment cite several benefits to the tax break — namely 21,180 new jobs in California and more than $1.1 billion in state income in 2011, rising by 2015 to 37,529 new jobs and more than $3.3 billion in personal income, according to the study, prepared for BayBio by Ernst & Young.

California is one of four states set to implement single sales factor apportionment over the next two years; the others are Colorado, Indiana, and South Carolina. A fifth state, Minnesota, will adopt single-source sales on Jan. 1, 2014.

Nineteen states already use single-source sales formulas: Colorado, Connecticut, Georgia, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, New York, Ohio, Oregon, Texas, Virginia, and Wisconsin.

Steinberg and the labor coalition have won support for rolling back single source sales factor from the state's sixth-highest circulation daily newspaper, the San Jose Mercury News, which serves the Silicon Valley region.

"Corporations looking to expand are just as likely, and perhaps more so, to consider a state's quality of life and the conditions of its public schools and universities," the newspaper wrote. "Those factors are fast deteriorating amid California's financial meltdown that was compounded, in part, by ill-advised tax concessions. Rescinding them should be part of the next budget deal."

Legislative leaders and Gov. Arnold Schwarzenegger are scrambling to plug the $24 billion shortfall cited by the nonpartisan Legislative Analyst's Office by hammering out a mix of budget cuts and new revenues that will win the two-thirds approval in both legislative houses needed to pass a new spending plan.

The governor has proposed $16 billion in cuts, compared with $13 billion by Steinberg and the Assembly, which has shifted from an earlier stance of wanting $7.3 billion in cuts. Steinberg has also proposed using $3 billion of the state's $4.5 billion in budget reserve funds toward the budget, an idea Schwarzenegger opposes; while Assembly speaker Karen Bass (D-Los Angeles) on June 15 announced her chamber would seek another $6 billion in new taxes and fees; Schwarzenegger and Republicans in both chambers have generaly opposed new taxes, though six Republicans voted with Democrats on a $14 billion tax package to produce the FY 2009 budget in February.

"There are several ways that we're looking at revenues, and people are coming to us with solutions too. We're trying to be as open as possible," Bass said at a news conference earlier this month. "I do think it's going to take us the rest of the month to have a complete solution. I can't say what that is because we're trying to identify that."

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