Whitman’s “Targeted Tax Cuts” Could Have a High Price Tag

(Editor’s Note: This post has been REVISED. The new business tax Whitman refers to is the minimum tax paid by all businesses that have limited liability. That includes corporations, LLC’s, LP’s, LLP’s and LLLP’s. Whitman is not referring to the filing fee paid to the Secretary of State. Eliminating the filing fee costs the state $37 million. Elimination of the minimum tax costs the state $340 million, acording to fiscal year 2007-2008 figures. The cost of the targeted tax breaks has been revised upwards and a paragraph on the minimum tax substituted for the paragraph on the filing fee.)

While insisting an across-the-board tax cut would “irresponsibly grow the state’s already over-sized debt level,” GOP gubernatorial candidate Meg Whitman proposes tax cuts of at least $4.7 billion and as much as $12.3 billion.

In her 45-page campaign manifesto, Building a New California, Whitman proposes nine tax cuts, credits or exemptions, the most significant being elimination of California’s tax on capital gains.

“Instead of promising immediate, across-the-board tax cuts now, (Whitman) has a better, more realistic plan: spark job growth now by quickly enacting targeted tax cuts that are affordable and immediately impact key sectors of our economy to create new jobs,” the campaign piece says.

Whitman’s GOP opponent, State Insurance Commissioner Steve Poizner pitches his “10-10-10” plan – a 10 percent across-the-board tax cut, a 10 percent state spending reduction and a 10 percent budgetary reserve fund.

In their first debate on March 16, Whitman said Poizner’s proposal would increase the state’s current $20 billion by $10 billion. Poizner, for his part, said Whitman’s targeted tax cuts weren’t enough.

A 10 percent reduction in the sales tax is approximately $3 billion. using estimates in Gov. Arnold Schwarzenegger’s proposed budget, a 10 percent cut in personal income tax would be $4.6 billion. A 10 percent cut in bank and corporation tax, another $1 billion.

It’s hard to attach a price tag to some of Whitman’s ideas, such as a tax credit to encourage investment in water conservation technology and creation of academic enterprise zones, because the drain on state coffers depends on how generous the credits are. Whitman’s campaign magazine doesn’t specify.

But other proposals she offers have been made in the past and can be quantified, such as eliminating the state’s tax on capital gains.

Over the past decade, state tax records show capital gains collections totaling $70.3 billion, ranging from a low of $3.2 billion annually to a high of $11.7 billion — an average of $7 billion between 2000 and 2009. The better the economy, the higher the collections as investors cash out their winnings.

Schwarzenegger’s budget estimates $5.3 billion in capital gains tax receipts in 2010.

Whitman would bump up the state’s research and development tax credit from 15 percent to 20 percent. An April 2008 analysis of state tax exemptions and credits by the Legislative Analyst’s Office pegged the cost to the state of the existing credit at $955 million. Using the analyst’s figure, Whitman’s proposal would cost the state roughly an additional $50 million.

A sales tax exemption or credit for purchases of manufacturing equipment costs $870 million annually, according to legislative budget writers.

Whitman calls the absence of such an exemption a “factory tax,” arguing the lack of one is a “major obstacle to keeping high-paying manufacturing jobs in California.

California previously had a “Manufacturer’s Investment Tax Credit” which forgave the state’s share of sales tax – 5 percent – for purchases of manufacturing equipment.

Then Assembly Speaker Willie Brown placed a caveat in the measure that the exemption would expire the year after a year in which manufacturing jobs did not exceed the number of manufacturing jobs on January 1, 1994 by an 100,000.

On January 1, 2003, manufacturing employment failed to exceed the 1994 employment number by more than 100,000  — actually it was more than 10,000 jobs less than the 1994 number – and the exemption expired.

Among Whitman’s other proposals, eliminate the $800 minimum tax paid by all businesses that have limited liability. That includes corporations, LLC’s, LP’s, LLP’s and LLLP’s. For the 2007- 2008 fiscal year, the minimum tax brought in about $140 million for corporations and $200 million for LLCs.

Several of Whitman’s ideas have already come to pass.

On March 24, Schwarzenegger signed into law SB 71 allowing the state to grant a sales tax exemption for manufacturing equipment purchased by so-called green technology companies.

The law defines green as cogeneration technology, energy conservation, solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels.” Also included, “advanced electric distributive generation technology and energy storage technology.”

“(This bill) will send a clear message to every CEO and every entrepreneur and innovator that if you invest in the clean future of California, then California will invest in you,” the GOP governor said.

The law requires the Legislature be notified when the total of the exemptions hits $100 million. No further exemptions can be granted without legislative approval.

One day later, Schwarzenegger signed AB 183 allowing first time homebuyers a tax credit equal to the lesser of 5 percent of a home’s purchase price or $10,000.

The credits are available for purchases made between May 1, 2010, and December 31, 2010 or between December 31, 2010, and before August 1, 2011.

The measure is an extension of a similar credit that expired last year.

The credits are capped at $200 million – half for buyers of new homes, half for first time buyers of existing homes.

Assuming a $10,000 credit, it must be written off over three years — $3,333 each year.

Whitman says she would provide the same thing but makes no mention of limiting it to first-time homebuyers.

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