Brown Has New Tools for Luring Companies to California

California Governor Jerry Brown has a new set of tools for luring companies like Boeing Co. to expand in or move to the state, including a discretionary pot of money his administration can use to sweeten deals.

Beginning Jan. 1, Brown’s administration will have $30 million in tax credits it can award to companies to add or keep jobs in the state, an amount that increases to as much as $200 million annually. Also, starting in July California will let some businesses and biotechnology companies write off the state’s 4.19 percent sales tax on the purchase of manufacturing and research and development equipment.

California, the world’s 10th-largest economy and headquarters of 13 percent of companies on the Standard & Poor’s 500 Index (SPX), has long been criticized by business groups as being unfriendly to employers. Its statewide manufacturing equipment tax credit expired a decade ago, and it has the highest income and sales taxes of any U.S. state.

“It’s not a bad idea for state leaders to have some flexibility to make a deal with people,” said Dorothy Rothrock, vice president of government relations at the California Manufacturers and Technology Association. “It should help California be a little more nimble and responsive when companies come and say: ‘Hey, we’d be here except for this problem or that problem.’”

The number of new manufacturing jobs in California has risen just 0.55 percent since 2010, compared with 4.59 percent nationally, the association said, citing data from the U.S. Bureau of Labor Statistics.

Boeing Bid

California, along with Texas, Utah, South Carolina and Missouri, is courting Boeing (BA) as the company considers moving its 777X aircraft assembly from Seattle after machinists union leaders rejected contract terms.

The company already has 19,361 workers in California, including those at the C-17 Globemaster transport jet assembly plant in Long Beach. Boeing said it plans to close the facility by 2015 as shrinking military budgets force an end to production there.

Brown’s Office of Business and Economic Development declined to say what kinds of incentives were offered to Boeing.

The pot of discretionary tax credits is among the changes Brown wanted to California’s 27-year-old enterprise zone program, which was set up to target state business subsidies to blighted areas.

“The Governor’s economic development initiative, which includes the ‘California Competes’ tax credits, gives the state a more flexible and dynamic set of economic development tools to compete for job expansion projects and attract more investment,” Kish Rajan, director of the development office, said in an e-mail.

Phase Out

Brown insisted the enterprise-zone program wasn’t working, with incentives flowing to parts of the state not suffering from high unemployment and instead being used to subsidize low-wage jobs in restaurants, retail and even strip clubs.

In July he signed a pair of bills that phase out the enterprise zones, which had granted hiring tax credits and a sales and use tax exemption on equipment purchases to businesses within the zones.

“The idea is to target those industries where the state wants to see and the governor wants to see greater growth in technology and industrial technology businesses that pay higher wages,” said Craig Johnson, president of the California Association of Enterprise Zones.

Minimum Wage

Brown’s plan targets the hiring credits to areas with high unemployment and excludes retail, restaurants, temporary agencies, casinos, bars and strip clubs. Employers would be eligible for a credit of 35 percent a year on the wages of a newly hired worker.

The credits apply to wages that are 150 to 350 percent of minimum wage, or $15 to $35 an hour when the state’s new minimum wage is phased in by 2016.

Further restrictions include use of the credits only for hiring the poor or those who have been out of work for more than six months, as well as veterans, ex-convicts or people on welfare. The program expires in seven calendar years unless extended by lawmakers.

Companies that claim a credit must show they used it to increase the number of jobs they have in the state rather than to subsidize existing workers.

The bills also created a statewide exemption from California’s sales tax on the purchase of manufacturing and research and development equipment except for oil, natural gas and mining companies.

Until now, only companies within enterprise zones could claim such an exemption.

‘Very Favorable’

“The enterprise zones credits were very favorable to those companies within the enterprise zone but California really needed a statewide sales tax exemption,” Rothrock said.

Before the law, California was one of only four states that didn’t have a sales tax exemption or credit for the purchase of manufacturing equipment, according to the Manufacturing and Technology Association and the Milken Institute. The exemption program expires in eight fiscal years unless extended by lawmakers.

“Taxing input is a real anti-incentive for growth,” she said. “You are pyramiding a tax to the final product as opposed to taxing it once at consumption. You’re layering this tax along the way. It’s bad tax policy.”

To contact Bloomberg News staff for this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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