Prometheus 6: Another fiscal body blow for California

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February 24, 2004

Another fiscal body blow for California

Court Deals Blow on Budget
The state could sink $650 million more into the hole after a decision on corporate taxes.
By Marc Lifsher and Evan Halper
Times Staff Writers

February 24, 2004

SACRAMENTO — California's budget deficit appeared to grow by about $650 million Monday, after the U.S. Supreme Court refused to review a ruling that state corporate tax laws impede interstate commerce.

The move was more bad budget news for Gov. Arnold Schwarzenegger and state lawmakers, coming less than a week after nonpartisan Legislative Analyst Elizabeth G. Hill warned that the state's economy is improving more slowly than expected, causing revenue projections to drop by more than $1 billion.

"Not the way you want to start your workweek," said state Department of Finance spokesman H.D. Palmer. "There is no question this is a substantial hit."

The latest setback is the result of a state law that allowed corporations to deduct from their taxes dividends received from other corporations, as long as those dividends were paid from corporate income that was taxed by California.

The deduction originally was created to provide an incentive for California firms to invest in other companies in the state without being penalized with double taxation.

State courts ruled that the provision violated federal laws regulating interstate commerce. The ruling will force California to provide refunds and interest to affected corporations.

According to the Franchise Tax Board, the state will have to pay $800 million in refunds to between 1,000 and 2,000 corporate taxpayers with dividend income from out of state. [P6: ]

That would include some of the largest corporations doing business in California, such as Microsoft Corp. and Hewlett-Packard Co.

But because the board is considering jettisoning the dividend tax break, the revenue loss could be offset by $150 million in new taxes the state could collect from companies that had been receiving the break since 2000, said board spokeswoman Denise Azimi. Those same companies could in the future face a new, ongoing obligation of about $35 million a year, she added.

The new ongoing obligation of $35 million would take 18 or so years to fill the hole that's just been dug.

Posted by P6 at February 24, 2004 06:30 AM
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