California Hastens Tax Breaks to Lure Aerospace Industry

Photographer: Frederic J. Brown/AFP via Getty Images
The government has said it may buy as many as 100 of the planes toreplace the aging B-2 stealth bomber built by Northrop, generating billions of dollars in revenue for the contractor chosen to build the new model.

(Corrects story published July 18 to show in 12th paragraph that Skunk Works is a Lockheed Martin facility.)

California Governor Jerry Brown signed a law earlier this month granting a $420 million tax break for aerospace companies to help Boeing Co. (BA) and Lockheed Martin Corp. (LMT) bid for a lucrative U.S. bomber contract.

After Northrop Grumman Corp. (NOC), which also is bidding for the federal business, complained about favoritism, state lawmakers promised help for Northrop, too, when the legislature returns from vacation next month.

California was at the center of the U.S. aerospace business before defense cuts led to loss of more than half the industry’s jobs in the state from 1990 to 2000. The tax incentives and other promises to ease regulatory hurdles are part of a push by Brown and lawmakers to woo back high-paying jobs at a time when the 76-year-old Democrat suffers from a perception that he is unfriendly to business.

“They are going to be able to take this tax credit and put it on their application,” said Assemblyman Steve Fox, a Democrat who authored the bill. “They are going to win the contracts and they are going to bring the bacon home.”

Fueled by defense spending during the Cold War, California was the site of one in four aerospace jobs nationally by 1987, according to the Los Angeles County Economic Development Corp. During the 1990s, aerospace employment in California plummeted 57 percent, compared with 40 percent nationally.

Photographer: Ken James/Bloomberg

The Air Force said in a statement July 10 that it expected to choose the developer next year. The law Brown signed July 10 gives aerospace subcontractors in the state a 17.5 percent tax credit on wages paid to workers who would build the plane. Close

The Air Force said in a statement July 10 that it expected to choose the developer next... Read More

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Photographer: Ken James/Bloomberg

The Air Force said in a statement July 10 that it expected to choose the developer next year. The law Brown signed July 10 gives aerospace subcontractors in the state a 17.5 percent tax credit on wages paid to workers who would build the plane.

Companies Moving

California, home to more companies in the Standard & Poor’s 500 Index (SPX) than any other state, has seen dozens of employers depart for places such as Texas. That, executives say, points to California’s highest-in-the-nation income and sales tax rates, plus a cost of living that is sixth highest in the country, according the Missouri Department of Economic Development.

In 2012, Apple Inc. (AAPL) chose Texas to build a new operations hub after the state offered $21 million in tax incentives. Toyota Motor Corp. in April said it was moving 2,000 California jobs to a new North American headquarters in suburban Dallas. While the carmaker said it made the move to be closer to southern manufacturing facilities, Texas offered the company $40 million in incentives.

“California’s regulatory and cost climate creates a competitive disadvantage for manufacturing compared with other states and it is therefore extremely unlikely that the state will be chosen as a site for major new manufacturing projects without incentives or regulatory relief,” said Jack Stewart, president of California Manufacturers & Technology Association.

New Bomber

The new bomber is described by the U.S. Air Force as vital to reaching far-flung, heavily defended targets worldwide. The government has said it may buy as many as 100 of the planes to replace the aging B-2 stealth bomber built by Northrop, generating billions of dollars in revenue for the contractor chosen to build the new model.

The Air Force said in a statement July 10 that it expected to choose the developer next year. The law Brown signed July 10 gives aerospace subcontractors in the state a 17.5 percent tax credit on wages paid to workers who would build the plane.

Bethesda, Maryland-based Lockheed, the biggest U.S. government contractor, and Chicago-based Boeing, which is No. 2, said in October that they planned to bid on the project as a team. Boeing said in April that it will move 1,000 engineering jobs from Seattle to Southern California.

Lockheed’s so-called Skunk Works in Palmdale, begun during World War II, is center of innovation that has produced the F-117 radar-evading stealth fighter, the U-2 spyplane and the SR-71 Blackbird surveillance aircraft.

Prime Contractor

Northrop Grumman, which built B-2 bombers in California and has 24,000 workers in the state, objected when the bill was passed because, as a prime contractor, it doesn’t qualify for the tax credits. Company spokesman Tim Paynter said in a statement at the time that the bill was a “blow to fairness.”

“We have committed to an equal and fair process for Northrop Grumman to compete in the same manner,” Speaker of the Assembly Toni Atkins said the day the bill was passed. “We are continuing to meet with them. This is all about creating jobs in California.”

Brown in April signed a bill that grants a 10-year tax exemption for equipment used in space travel after billionaire Elon Musk’s Space Exploration Technologies Corp. found itself in a dispute over taxes with the Los Angeles County assessor’s office.

Space Business

The county argued that rockets used for space travel are considered business supplies and are therefore subject to property tax even if they are lost or destroyed in orbit after launch and don’t return to Earth.

That bill was supported by Aerojet Rocketdyne Inc., a division of GenCorp Inc. (GY), as well as Northrop Grumman, Lockheed Martin and the Commercial Spaceflight Federation.

Brown has also targeted the automotive industry, trying to ensure that Musk’s Tesla Motors Inc. chooses California for expansion. Tesla employs more than 6,000 people in the state.

Brown’s administration pushed lawmakers to insert language into the aerospace tax-credit bill aimed at trying to win California as the site for Tesla’s proposed $5 billion battery “gigafactory.”

Tempting Tesla

The language allows companies making certain types of batteries eligible for the tax credit. State lawmakers also have promised to push for regulatory changes that would make it easier for the company to build the factory in California.

Tesla is studying sites in Arizona, New Mexico, Nevada and Texas for the plant. Musk in May said California is also a potential candidate for the factory, which would employ as many as 6,500 people.

Texas Governor Rick Perry last month appeared in Sacramento driving a Tesla, telling reporters he wished it had a “made in Texas” bumper sticker.

“We’ve been pretty straightforward about our interest in creating manufacturing jobs in California,” said Panorea Avdis, chief deputy director for Governor Brown’s Office of Business and Economic Development. “Tesla is a California company and we certainly have an interest in a California company growing in California.”

(Earlier versions of this story misspelled Northrop Grumman.)

To contact the reporter on 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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