The key to economic growth is investment in new businesses and jobs. But all investments are risks. You might make a lot of money—or lose it all. The way to boost investments is to reduce risks. One way to do so is to cut taxes to boost profits.
From 2024 to 2028, AB 52 would exempt manufacturing and research equipment from the state sales and use tax.
As the bill itself notes, 38 states “fully exempt manufacturing equipment from sales and use tax. With California’s current partial exemption, taxpayers pay more to buy equipment in California than they would elsewhere, creating a competitive disadvantage for the state. ... California has the highest state-level sales tax rate among the 50 states in the United States, and after local rates are accounted for, sales and use tax rates in California can reach up to 10.75 percent.”
That competitive disadvantage also exists toward manufacturing in China and other countries with cheap or even slave labor. With growing international tensions, AB 52 also is part of bipartisan efforts to bring more manufacturing back to America. Moreover, manufacturing jobs include many working-class jobs for people without college educations, a group of workers slighted in recent decades.
“The exemption from paying sales and use taxes on manufacturing equipment is meant to increase investment in manufacturing equipment in California by decreasing the cost of purchasing such equipment,” Raymond Sfeir, director of the A. Gary Anderson Center for Economic Research at Chapman University, told me.
“In this regard California is playing catch up with the other states, since 38 of them already have such an exemption. At any time, an increase of any type of investment will enhance the growth rate of the California economy by increasing the productive capacity of the manufacturing sector of the state,” he said.
“Firms will be more likely to replace old equipment due to the decrease in cost. Others will now be more willing to purchase new equipment. The benefit will not accrue to manufacturing firms only, but also to those who manufacture the equipment through the increase in their sales. Although the measure taken will help the California economy, it would not be enough in itself to prevent the expected lower growth rate later this year.”
“California is an expensive state for manufacturing firms,” Sfeir said. “It is difficult to compete with the lower costs that exist in some other states and other countries. The excessive taxation system and innumerable regulations add to the difficulties facing manufacturing firms beside the high cost of living, high housing prices, and much higher wages and salaries. The exemption from sale and use taxes on equipment is a step in the right direction.”
Although California would “lose” the tax revenue from the tax cut, the long-term effect would be to increase taxation from a higher tax base. More manufacturing would mean more taxes of other kinds—especially from California’s high income tax, with a 13.3 percent top rate—paid by company owners and employees. When businesses are chased out of California, they no longer pay any taxes here. Enticing them to stay just makes sense.
Indeed, Sfeir said, “More is needed to be done in order to stem the flight of firms to other states and other countries. The net outflow of people from California to other states is getting higher and higher every year. It is a problem that Sacramento has not been willing to address so far.”
AB 52 does not eliminate risk, as foolishly has been done to the banks, but reduces it, encouraging more real investments.
The only problem with the bill is it will expire after 2018. However, the bill also would mandate: “The Legislative Analyst’s Office, on or before January 1, 2027, shall review the effectiveness of the credits allowed under this section and post the review on the office’s internet website.” No doubt the review would show the creation of thousands of jobs, and the replacement of the “lost” revenue with much larger receipts from the income taxes of the new businesses and workers. Then AB 52 could be extended, or made permanent.
It’s rare California ever cuts taxes. This is an opportunity that ought not be missed.
