Daily Tax Report: State

INSIGHT: California’s Response to ‘Corporate Welfare’

Nov. 1, 2019, 1:00 PM

While the efficacy of corporate incentives has been questioned for quite some time, recently incentives to large corporations have become under greater scrutiny. In fact, some have called these incentives “corporate welfare.”

Among others, the recent competition for Amazon’s second corporate headquarters (HQ2) has stirred up the controversy and concern over the use of mega tax breaks to lure the retailer’s HQ2 project. California lawmakers and activists have been no exception.

Three pieces of legislation recently moved forward for the governor’s signature. Two were vetoed, and one was enacted. A.B. 485 was signed into law on Oct. 12, 2019. This new law enhances the transparency into local tax incentives. Although each local agency had previously been required to hold hearings on economic development subsidies, starting on Jan. 1, 2020, the local agency will be required to submit an annual report as to the results of the incentive. Specifically, the new law applies to subsidies for a warehouse distribution center, and the report must contain information related to the revenue that will be generated by the project as well as information related to employment statistics for the project. In addition, the agency must hold annual public meetings to consider comments to the results of the development. The reports shall be made available to the public. Accordingly, the agreements must not contain any nondisclosure clauses. Governor Newsom believes that this legislation will create an atmosphere of transparency with respect to incentives, and particularly address the concerns of the increasing number of incentives provided to retail distribution centers located in the state.

The governor vetoed the controversial senate bill that would have prohibited local governments from offering sales tax incentives to entice retail distribution centers from locating in their community. S.B. 531 would have barred a local agency from entering into an agreement that would have used sales tax revenue to entice a business to locate operations in any jurisdiction. In his veto message, Governor Newsom said that the elimination of local sales tax agreements “is the wrong approach.” The agreements are “an important local tool that captures additional economic activity, particularly in rural and inland California cities that continue to face significant economic challenges like high unemployment rates.” He believes that the greater oversight and transparency provided by A.B. 485, “will allow the state to better understand the nature of the agreements between local jurisdictions and businesses, as well as the challenges and obstacles to inclusive growth.”

S.B. 468 was also vetoed by the governor. The bill would have required the state to create a review board to evaluate business incentives and make recommendations as to whether the incentives should be repealed, modified, or continued. Originally the bill proposed to repeal all major business tax incentives. However, the bill was modified to focus on certain statutory credits like research and development credits, water’s edge elections and like-kind exchanges. While the governor supports greater transparency with respect to tax credits, he believes that this effort is supported by A.B. 485, and a new board to scrutinize incentives is not necessary to meet this goal.

In the end, California cities will still be able to compete with other jurisdictions in their efforts to attract businesses, and it will now be on a fair and open playing field, as these incentives will be open to public inspection, and businesses will be held accountable to deliver what was promised in terms of local economic development and employment opportunities.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Mark L. Nachbar is a principal at Ryan LLC and Joseph Dean is a manager at Ryan LLC.

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