(April 25, 2005) The California Chamber of Commerce is working with legislators and other business organizations to make a positive change in the state tax system by restoring the manufacturers investment credit (MIC) or providing for a sales tax exemption on manufacturing equipment.

Since legislative inaction left the MIC to expire at the beginning of 2004, California has been one of only three states that taxes manufacturing equipment, allowing neither a credit nor an exemption.

“To stabilize state finances, California needs an economic climate that encourages businesses to grow and create jobs here,” said Erika Frank, Chamber legislative advocate and general counsel. “Reinstating the manufacturers investment credit would be an important signal to employers that California is serious about making them welcome.” 

Background
Lawmakers enacted the MIC in 1993 to help make California competitive with other states as a business location and to encourage long-term investment to help move the state out of the recession. The law allowed a business a tax credit of 6 percent against income taxes when investing in manufacturing equipment.

In addition, a new or small business taxpayer could claim a sales tax exemption of 6 percent. The 6 percent was determined based on the portion of the sales tax rate that was allocated to the state (the rate was reduced temporarily to 5.75 percent in 2001).

One purpose of the MIC was to encourage new job creation, and so the original legislation included a provision making the MIC inoperative if new jobs were not created.  

Unfortunately, the provision did not consider the possibility that the state would lose significant numbers of jobs after an initial job creation boom. Therefore, while the MIC helped stimulate job creation in the 1990s, other factors that discouraged job creation led to a decline of manufacturing jobs. When the Legislature failed to continue the MIC, the credit lapsed and has not been reinstated since.

Current Legislation
The following bills relating to investment credits are moving through the legislature:

• AB 80 (Houston; R-Livermore) encourages investment in California through a sales tax exemption for manufacturing and telecommunications equipment.  Assembly Revenue and Taxation Committee hearing May 16.
• AB 344 (Villines; R-Clovis) declares the Legislature’s intent to reinstate the sales tax exemption and personal income tax and corporation tax credit previously provided to manufacturers.  Re-referred to Assembly Revenue and Taxation Committee, no date has been set.
• AB 845 (Ridley-Thomas; D-Los Angeles) reinstates the sales tax exemption, but sets a sunset date depending on growth in employment and limits the exemption based on the manufacturer’s aggregate gross assets. Assembly Revenue and Taxation Committee hearing May 16.
• AB 1580 (Torrico; D-Newark) encourages investment in California through a sales tax exemption for manufacturing and telecommunications equipment.   Assembly Revenue and Taxation Committee, no date has been set.
• SB 552 (Alquist; D-Santa Clara) calls for sales tax exemption credits to begin accruing on January 1, 2006, and to be redeemed during the first state budget fiscal year in which state revenues match expenditures. Senate Revenue and Taxation Committee hearing April 27.
• SB 631 (Dutton; R-Rancho Cucamonga) reinstates the MIC and broadens the sales tax exemption to include equipment purchases by electrical generators. Senate Revenue and Taxation Committee, no hearing date set. 

The Chamber supports reinstating and expanding the MIC. The availability of the credit would be a positive change that would help California compete with other states for jobs and investment.