Brown Seeks California Sales-Tax Cut on Manufacturing Gear to Spur Jobs

California Governor Jerry Brown unveiled measures to spur job creation, including legislation to curb taxes on manufacturers such as Boeing Co. (BA) while dropping a corporate tax break he said pushes jobs out of state.

Under the proposal, the state would exempt start-ups from paying sales taxes on purchases of manufacturing equipment, while lowering the levy by 3 percentage points to 0.9 percent for existing companies. The cut would take about $1 billion from state revenue annually. To pay for it, Brown would end an option letting companies base their taxes solely on California sales and make applying a single-sales factor levy mandatory.

“We must do more to build economic momentum,” Brown, a 73-year-old Democrat, said today in a statement.

Current state tax policy is “outrageous and perverse,” the governor told reporters in the statehouse in Sacramento. He was joined by Andrea Jackson, vice president of government affairs for Genentech Inc., who said her company built a $450 million plant in Oregon partly because it has a single-sales factor tax system. The move lightened the biotechnology firm’s California tax burden without increasing it in Oregon, she said.

“It’s bad policy,” Jackson said of the Golden State’s current levy system, which lets companies pick one of two tax methods to produce the lowest amount owed. “It incentivizes building out of state. Why wouldn’t California want to make the tax policy solid for building in California?”

Genentech, a unit of Basel, Switzerland-based Roche Holding AG (ROG), is based in South San Francisco.

Current System

Under current law, some California companies can choose between a formula that bases 50 percent of taxes on California sales, while the remaining half is split between in-state property and total sales, according to a Finance Department fact sheet. Those businesses can opt instead to base their payments solely on sales. Brown would end that option.

No Republicans are likely to support the governor’s proposals, according to the party’s leader in the Assembly, Connie Conway of Tulare.

“We see it as a tax, a fee, an additional burden,” Conway said in an interview. “It takes away an incentive that’s been offered to businesses.”

The proposals from Brown are aimed at reducing California’s jobless rate, which climbed to 12 percent last month, the second-highest level in the U.S. after Nevada. The state unemployment rate was 11.8 percent in June, compared with 9.2 percent nationwide. The U.S. figure declined to 9.1 percent last month, as California joblessness increased.

Change Sought Earlier

When Brown unveiled his fiscal 2012 budget proposal in January, he sought to make the single-sales factor levy mandatory, ending the choice companies have now. The change is projected to raise about $1 billion a year.

In 2009, lawmakers extended that optional system for companies as part of a budget deal to temporarily raise sales taxes and vehicle-registration fees. Previously, corporate taxes were based on sales, workforce and property in California.

“I believe this was an outrageous, unjustified tax break that very few people including the governor knew what the hell they were doing,” Brown said today.

Republicans Needed

Applying the single-sales factor measure would require passage by a two-thirds vote of the Legislature, meaning Brown would need to win over at least two Republicans in both the Assembly and Senate. The party’s lawmakers opposed the change when Brown included it in his budget proposal in January.

“This proposal will create in-state manufacturing,” said Assembly Speaker John A. Perez, a Los Angeles Democrat. With the budget completed, he said lawmakers can move forward “without getting bogged down by budgetary rhetoric and dogma.”

Brown also wants to expand eligibility for a small-business tax credit to include companies with as many as 50 workers and boost it to $4,000 from $3,000 for each new hire. To encourage immediate hiring, the changes would expire at the end of 2013.

Brown was joined by representatives of Boeing, the Chicago- based aircraft manufacturer, Abbott Park, Illinois-based Abbott Laboratories (ABT), and Tesla Motors Inc. (TSLA), an electric-car maker based in Palo Alto, California.

“We appreciate that the governor is focusing on the economy,” said Jack Stewart, president of the California Manufacturing and Technology Association, an industry group. “Our intractable state budget problems will never be solved until we encourage new investments and job creation,” he said.

“We look forward to working with the governor to make sure that his proposals will create new job growth without sacrificing existing jobs through higher costs,” Stewart said.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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