Bleeding Cash Through a Hole in the Tax Code

From President Obama to Governor Brown, politicians tout tax breaks as the way to create jobs and stimulate economic activity. Tax breaks supposedly lure businesses to California and give them incentives to create jobs for the 2.3 million currently unemployed Californians. California has over 82 tax breaks on the books and legislators push for new ones every session as part of job creation packages.

Some experts question the effectiveness of giving corporations billions of dollars in tax breaks with no guarantees that the company will create jobs, or that they won’t move jobs out of state. A recent study by the California Senate Office of Oversight and Outcomes reported that:

One of the biggest criticisms of tax expenditures—and the one most germane to this report—is that they can act like blank checks. Some tax expenditures are capped at a certain dollar amount, and others are required by law to undergo periodic review to make sure that the benefits exceed the cost in foregone revenue. But open-ended tax breaks, like most of those in California law, can swell far beyond initial estimates—with little or no notice. 

The report goes on to describe how ten of California’s tax breaks have cost the state $6.3 billion more than expected over the last ten years, and $1.3 billion just last year. The “blank check effect” explains much of the drain on the state’s coffers. Many of the state’s biggest tax breaks are not capped, do not require an application nor any requirement to create or retain jobs in the state. Once created, it takes a two-thirds vote to reduce or repeal a tax break, making it nearly impossible to get rid of outdated, wasteful or ineffective tax breaks.

The California Labor Federation worked both last year and this legislative session to reign in abuses of corporate tax breaks and to create alternative strategies for job creation. SB 364 (Yee) would hold companies accountable for job creation when they claim tax breaks. Very simply, if a company benefits from a tax break to create jobs and they fail to create those jobs, then they pay a penalty to the state. No longer will taxpayers subsidize corporations moving jobs around the state or out of state. 

Some business groups removed their opposition from the bill since it targets scofflaw companies that ship jobs out of state on the taxpayers’ dime. But the Chamber of Commerce and other industry groups remain opposed and are urging the Governor to veto the measure. They argue that measures such as SB 364 create an unfriendly business climate in California. Yet, 20 other states, including our neighbors Arizona and Nevada, have similar statutes on the book. 

And as the Senate report states:

Policies that go too far in starving public services to pay for tax breaks may sour the business climate rather than improve it. 

Not only is the Labor Federation fighting to make tax breaks more effective, but we also moved legislation this year to find alternatives to tax breaks as a strategy for job creation. With the support of the Manufacturers Association, the Federation co-sponsored AB 894 (V. Perez) with the Machinists. This bill would create the infrastructure for a state fund to give low-interest funds to manufacturers that want to create or retain jobs in California. 

Unlike most tax breaks, companies would have to apply to receive loans, and they would have to meet criteria like providing industry wages, health and retirement benefits, job creation and retention requirements with priority given to joint labor/management applications. Once the company has gotten the loan, created jobs and become profitable, they would pay back the loan so another business could benefit.

Instead of fighting one another, AB 894 is legislation that both labor and management can rally behind in order to create jobs and protect state services. Once the Governor signs the legislation the race is on to find money to capitalize the funds from the federal government or unused stimulus funds. Either way, the fund is a model for how job creation can be accountable, transparent and effective without bleeding cash out of the state budget.

We urge Governor Brown to sign these two important pieces of legislation today. Click here to send a message to the Governor in support of corporate tax accountability.