October 6th 2010

Sacramento Bee

By Kevin Yamamura

October 6, 2010

All eyes are on today's joint budget committee hearing set for 1:30 p.m., the prelude to Thursday's floor votes that could end the state's longest budget impasse.

But the real fireworks may be earlier today at the Senate Revenue and Taxation Committee hearing. The panel will meet for an informational session to review tax proposals in the budget plan, which are included in Assembly Bill 1618 and Senate Bill 858.

The committee, headed by Sen. Lois Wolk, D-Davis, will analyze corporate tax reductions in the latest budget agreement, as well as the proposal to suspend the $1.2 billion net-operating-loss deduction.

According to the committee analysis, these are among the reductions:

• A onetime exemption allowing the Humboldt Redwood Co. to deduct past operating losses. According to the North Coast company, Humboldt Redwood acquired the assets of the former Pacific Lumber Co. (PALCO) at the end of bankruptcy proceedings in July 2008. That acquisition assumed that Humboldt would be able to deduct $315 million in PALCO's past operating losses. But the state in 2008 suspended the net operating loss provision, resulting in unspecified higher tax costs. Humboldt Redwood argues that it has been a good actor who spared jobs and a sawmill in Scotia.

• Allowing multistate firms to calculate their California tax liability using a traditional and more favorable formula known as "costs of performance," a change sought by the California Cable Technology Association. The change would cost the state $28 million in 2010-11, $95 million in 2011-12 and $100 million annually thereafter. Multi-state cable providers say they were harmed under the 2009 tax break law that eliminated the old formula.

• Softer criteria for determining when corporations must pay penalties for understating their taxes. This change costs the state $40 million in 2010-11, $90 million in 2011-12 and $100 million in 2012-13. Republicans say that some corporations have legitimate reasons for understating taxes, such as engaging in international activity that relies on fluctuating exchange rates.

The latter two changes were a condition of Republicans agreeing to suspend the net operating loss deduction. But one source close to budget talks said GOP legislators did not demand the Humboldt Redwood tax break, although they were sympathetic.

Wolk took issue with the addition of these tax breaks at the end of the budget process, especially since their adoption now seems perfunctory under last week's handshake deal.

"My concern is the suspension is only temporary, and in order to get that, we have to vote to extend some permanent tax credit relief," Wolk said. "Any ongoing (tax credit) expenditure of $200 million is an expenditure where we'll have to find some service that will have to be cut unless money appears from heaven, the economy improves or we raise taxes."

– Kevin Yamamura

http://blogs.sacbee.com/capitolalertlatest/2010/10/most-intriguing-hearing-tomorr.html

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