10:00 PM PST on Monday, February 15, 2010

Sacramento Bureau

SACRAMENTO – California is losing billions of dollars in potential revenue through various tax credits, exemptions and deductions at the same time lawmakers have approved deep spending cuts to address the state’s enormous budget problems.

From no sales tax on tractor purchases to special business-friendly zones in San Bernardino and elsewhere, tax-benefit programs total more than $40 billion in lost general fund revenue in the current budget year and almost $43 billion in the next one, according to the most recent estimate by Gov. Arnold Schwarzenegger’s Department of Finance.

The governor’s latest spending plan calls for creating more tax breaks.

His proposed jobs package includes a $10,000 tax credit for buyers of existing homes and a proposal to exempt green technology manufacturing equipment from the state’s sales tax, at unknown cost to the general fund.

“We want to send a clear message to every CEO, to every entrepreneur and every innovator, that if you’re interested in a clean future and invest in a clean future in California, then California is interested in investing in you and in your company,” Schwarzenegger said Jan. 27 while visiting a Richmond company that manufactures solar arrays.

Supporters say the credits and other programs are a great way to target a range of public-policy goals, while more than paying for themselves by helping the economy and generating tax revenue.

The San Bernardino Valley Enterprise Zone is one of the 42 enterprise zones in California. Colin Strange, the project manager of the San Bernardino Redevelopment Agency, which participates in the zone, said it is a vital way to attract businesses and jobs.

“They came here purely because of the enterprise zone,” Strange said. “It’s about the only tool that we have in this state that can give us a competitive edge.”

But as the state’s budget mess has worsened, the Legislature’s nonpartisan fiscal analyst has proposed rolling back some tax benefits. The Legislative Analyst’s Office and others say some of the programs are difficult to evaluate and hard to change once in place.

A July 2009 report by the nonpartisan Public Policy Institute of California said the 20-year-old enterprise zone program, for example, has had “no overall effect on job growth.”

Since last February, the state has cut billions in spending to help close a budget hole totaling about $60 billion through June 2009. Additional reductions are on the table to address a projected shortfall of $20 billion through June 2010.

“In an era when we’re looking at eliminating in-home care for the elderly and cutting back on almost everything, we need to look at whether we’re getting our money’s worth” from the programs, said Jean Ross, director of the California Budget Project, which analyzes budgets’ impact on low- and middle-income residents.

Long history

Some state tax benefits are decades old. Many were put in place to ensure the state conformed with federal tax law, such as the deduction of home mortgage interest.

Others aim to encourage certain types of behavior, such as playing the California Lottery. In 2010-11, the lottery exemption will cost the state an estimated $49 million, according to the Department of Finance.

Some tax benefits are meant to create jobs. The largest of those is the research and development tax credit for corporations’ research spending. In 2010-11, the credit translates into an estimated general fund revenue loss of $1.15 billion.

“If the tax credit has an economic benefit that outweighs the actual dollar loss, then we should be doing it,” said state Sen. Bob Dutton, R-Rancho Cucamonga, the incoming Senate GOP leader.

The creation of tax benefits sometimes helps close political deals in the Capitol.

Last February’s budget agreement will reduce multi-state corporations’ taxes on their California sales starting next January. The package also creates credits for new hires and in-state film production.

In 2001, the Legislature exempted several items from the sales and use tax to help win budget votes from rural lawmakers. The package’s two biggest exemptions — farm equipment and diesel fuel used in farming and processing — will cost the state an estimated $160 million in 2010-11, according to the state Department of Finance’s latest tax-expenditure report.

Budget cuts have reduced funding for related services.

The state has eliminated payments to counties to encourage farmland preservation at the same time it is offering the sales-tax exemptions on farm equipment and diesel fuel.

In addition, lawmakers have cut housing assistance and other programs meant to help low-income senior citizens. Meanwhile, state income tax benefits for senior citizens total more than $2 billion, according to the Department of Finance.

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