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San Fernando
Thursday, Mar 28, 2024

State Tax Incentives are Effective Tools

Tax incentives have been used for many years as an effective tool to induce taxpayers to carry out certain desired activities. These activities have included but were not limited to purchasing manufacturing equipment; purchasing solar or other energy efficient products; hiring disabled persons and persons from economically disadvantaged neighborhoods; locating businesses in disadvantaged or re-development areas; attracting or retaining certain industries; and providing benefits to employees. The tax incentives have taken numerous forms and have been applied at all levels of government. My discussion will concentrate on tax incentives at the state level, specifically related to the California State Income Tax. Income tax incentives can include either tax deductions or tax credits. Many people I have talked with have used the terms interchangeably but those who are more familiar with taxes know that there is a vast difference between a deduction and a credit. A tax deduction of $1,000 in California will save approximately $90 in tax whereas a tax credit of $1,000 will save $1,000 in tax. Tax credits can be refundable or non-refundable. A non-refundable credit (“NRC”) can only be utilized as a reduction of a tax liability whereas recipients of a refundable credit (“RC”) will receive a cash payment if there is no liability to offset. If there is a liability but it is too small to absorb the entire RC, the excess credit will be paid to the taxpayer. The refundable credit is significantly more controversial among legislators and therefore utilized much less than the non-refundable credit. Since payment of an RC is made to the taxpayer whether or not the taxpayer has paid in any money, it is in essence a subsidy (a word that is distasteful to many legislators). Although tax incentives have proved to accomplish their goals and provide economic growth, there are legislators that consistently oppose them, especially those credits intended for corporations. These legislators refer to the incentives (primarily tax credits) as corporate welfare designed to make the rich richer. Unfortunately these legislators that say and believe this are failing to recognize that when business thrives, employment increases and everyone benefits. It appears that continuous claims by labor groups (that employers are consistently earning excessive profits by exploiting workers) are causing these legislators to be reluctant to help business thereby creating a detriment to all. In recent years California has experienced the loss of much of its manufacturing industry due to companies either leaving the state or outsourcing their operations to other countries or states because of excessive regulation and the high costs of doing business here. Unfortunately, although revenues from this sector have declined significantly there are legislators that don’t believe there is a problem. I recently asked one of our state Senators: “What will happen to the displaced assembly-line workers who are unable to be trained for higher level jobs?” His response was that it isn’t a significant problem because statistics don’t support claims that manufacturing companies are leaving California in droves. Although manufacturing companies may not be leaving in droves, they are, in fact, leaving and the number of companies that are outsourcing their manufacturing operations has steadily increased. Another industry that is continuously shrinking in California is film production. First, Canada began poaching our film production by offering significant RCs then other countries including Australia, Romania, the Czech Republic, Italy and many more joined in. More recently, other states have become significant threats to this industry. The common thread to the poachers’ successes is significant tax incentives including RCs, NRCs and reductions in or exemptions from sales taxes, business license taxes, hotel taxes etc. In 2002 approximately 82% of all film production in the United States was done in California. Now there are reports indicating that filming in California accounts for only 50% of United States film production. At last count there were 28 states offering tax incentives to attract film production away from California. To make matters worse, it has been estimated that for every dollar of lost production, the California economy is negatively impacted by seven dollars. Therefore the loss of a $10 million production results in a $70 million negative impact on our economy. Last year Assembly Speaker Fabian Nunez (D- Los Angeles) introduced Assembly bill AB 777 that would have provided a RC of up to 15% of qualified labor costs on qualified motion pictures and 10% of incremental production costs on commercials. This bill and previous bills attempting to stem the tide of “runaway film production” by utilizing tax credits failed. It is anticipated that Speaker Nunez will co-author a bill this year that will provide similar film production tax incentives with the possibility of including tax incentives for other industries that are in jeopardy. It is also anticipated that Assemblymember Cameron Smythe (R-Santa Clarita) will introduce a bill providing for a manufacturers’ investment tax credit. Perhaps this is the year that our legislators will provide the much needed state income tax incentives that will save our important industries. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP and Vice-chair of the Valley Industry and Commerce Assoc. (VICA).

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