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Legislative Weekly
December 6, 2002
Workers’ Compensation Insurance Deductible Hearing Could Increase Workers' Compensation Costs
On December 18, the Board of Equalization will hear the Appeal of Wausau Companies challenging the imposition of premium taxes on the deductible portion of a large workers' compensation policy. In February 2002, the Department of Insurance decided to tax these loss reimbursement payments and to collect taxes for prior calendar years. While the current dispute is over calendar year 1997, the economic consequences of an adverse decision in this case would have a significant financial impact on insurers and employers' workers’ compensation costs.
At issue is whether the Department should be allowed to reverse a decision made by the previous Commissioner that such payments are not subject to taxation, allowing the collection of taxes for the previous five years, as well as going forward. CMTA believes that if the Legislature wanted to tax these deductibles (given its plenary authority over workers' compensation as established in the California Constitution) it should clearly state so and not leave such an important decision to the whim of a particular regulator in any particular year. Given the current budget deficit, it is of great concern that if the Board does not hear any objections from employers, it may be tempted to accede to the Department's demands.
CMTA has joined with a coalition of insurers and insurer trade associations to aggressively argue that as a matter of law and of public policy such important decisions cannot be made by bureaucratic fiat. In addition, the coalition has been joined in this issue by several trade unions that acknowledge that the safety incentives created by the large deductible policy are important to workers and that the use of these policies should not be hindered by adding the cost of an inappropriately assessed premium tax.
Many CMTA members currently use such policies and reap the benefit of lower premium costs. If the appeal fails, not only will those savings be lost, but those employers will also incur significantly higher premiums costs due to the hardening of the insurance market. CMTA believes that it is time for employers to make their positions known about this important issue to the Board. In addition, it is important for the Board to realize that large employers have the option of self-insuring, thus making the imposition of this tax counter productive. To the extent that large employers self-insure, their beneficial loss and expense experience is taken out of the insurance mechanism, leaving small employers to pay more of the actual cost of their own insurance. Therefore, all employers, even those who do not use deductible policies run the risk of higher insurance costs if this tax is imposed.
Write, fax or call the Board members and ask them to vote in favor of the Appeal of Wausau Companies. If you have questions or would like assistance, please contact Willie Washington at (916) 498 3322.
Manufacturing Investment Tax Credit - At Risk?
The Manufacturers Investment Tax Credit (MIC) is one of only a few tax incentives the state offers businesses in California. The six cent reduction in state taxes for every dollar invested in plant and equipment by manufacturers pays huge dividends in economic expansion and increased opportunity for California workers.
The MIC was not targeted last year during budget debates, a wise decision that reflected an understanding that California budget woes will not end until businesses begin growing and the economy rebounds. However, this year sunset provisions in the MIC itself might automatically do what policy makers chose to avoid even considering last year.
The MIC was enacted in 1994 as part of Governor Wilson's budget package to help revitalize the economy during the historic deficits of the early 90’s. A provision was included to sunset the credit if manufacturing employment drops below the 1994 job level plus 100,000 on any January 1 after the year 2001. (Aerospace employment levels are excluded from the calculation.)
There is speculation that manufacturing job losses have been so severe that the January 1, 2002 employment number may drop below the threshold and the MIC would cease to exist on January 1, 2004.
CMTA believes that the employment trigger is not a realistic measure of its effectiveness. It assumes that all things being equal, the MIC should create 100,000 more jobs, and that the jobs will be sustained in all years after 1994 if the credit is working to the benefit of California.
In fact, the first years after the MIC began, job creation in California was phenomenal. However, in more recent years, the reality is that not all things have stayed equal - huge cost increases in electricity, workers compensation, unemployment insurance and other costs have been imposed on the manufacturing sector, swamping the economic stimulus of the MIC and making California's costs of doing business 32% higher than other states. The state tax burden alone on California manufacturers since 1994 has risen from 6% to 23% higher than the national average.
Allowing the MIC to expire at this time would be a huge mistake. The combination of high California cost burdens and the global decline in demand for the high-tech goods that since 1994 has fueled economic growth in California has stalled a recovery in this sector and would, to add insult to injury, remove the MIC! It is hard to imagine a more untimely and damaging message to struggling businesses - just when you most need encouragement to invest, when your cost concerns are at their highest, and when other states offer significantly lower costs of doing business, the state will increase your costs even more.
CMTA strongly believes the MIC should be retained and other economic stimulus measures should be embraced by policy makers as a critical part of the total solution to the current fiscal crisis.
Press coverage:
Key Tax Credit Could End for Manufacturers
Legislators eyeing business tax break
Tax Policy Conference February 4, 2003
CMTA will host a Tax Policy Conference on February 4, 2003 in Sacramento to promote the MIC and other tax policies that should be pursued to support business recovery. A legislative reception will follow the event. Sponsorships are being solicited. Contact Matt Sutton (498-3318) or Loretta Macktal (498-3314) for more information.
UCLA Anderson Economic Forecast for State is Grim
California's economic picture remains gloomy at least until mid 2003. While business investment may pick up in the second half of 2003, noticeable improvement in this sector will be offset by a significant drop-off in consumer spending brought on by a high debt load, economists at UCLA conclude in a report released on Thursday.
In his quarterly report titled, “The California Forecast: Looking for the Bottom,” Dr. Tom Lieser comments that the information technology industries and their suppliers and distributors across the country continue to suffer from substantial excess capacity and weak earnings. He also notes that major employers in this key sector are unlikely to increase hiring until operations become profitable and many companies are still undergoing staff reductions. In addition, there are other factors troubling the state's economic outlook, not the least of which is the state's enormous $23 billion plus budget deficit.
Other key findings of the of the California Forecast:
- Expect further slowing in export trade and continued sluggish consumer spending;
- Personal income in the state has fallen the past two years, fueled mostly by loss of manufacturing jobs;
- The technology sector will not rebound until business spending on equipment and software accelerates;
- The strength of auto and home sales have passed their peak;
- Commercial real estate has high vacancy rates and will cause construction to slow during the next two years;
- Traffic through LAX and hotel occupancy rates are down; and
- Bankruptcies are up.
The opening of the 2003-2004 Legislative session this week marks the return of some familiar environmental themes. Just in the first few days, several bills have been introduced as vehicles for issues left unresolved during the prior session, including the following:
 Jackson |
 Romero |
 Burton |
 Sher |
If these measures are a harbinger of things to come, then it appears that the state's budget crisis will have little impact on special interest environmental agendas, at least in the Legislature.
Energy Commission Eyes Transmission Siting Authority
In the first week of the new legislative session, no bills were introduced relating to energy. The slow start will definitely be short-lived, however. In all likelihood, the Legislature will have three or four dozen energy-related bills to consider by the February 21 bill introduction deadline.
One of the more interesting proposals floating around the Capitol would transfer siting authority for transmission projects from the California Public Utilities Commission to the state Energy Commission.
Legislative language is quietly working its way through the approval process at the CEC and the Resources Agency.
The CEC has not taken a formal position on the proposal, but it is no secret that many people at the CEC favor the idea. One of these supporters is Commissioner John Geesman, who was appointed to the CEC in July. Geesman has been a vocal proponent of transferring transmission siting authority to the CEC.
Under current law, the CEC has siting jurisdiction over generation facilities above 50 megawatts and very limited jurisdiction over transmission siting (i.e., transmission lines already associated with a power plant).
It isn't difficult to make the case for transferring transmission siting authority from the CPUC when you consider the commission's track record in this area. The Path 15 transmission upgrade is but one example of the CPUC's inability, or unwillingness, to approve needed transmission projects in a timely manner. And the stakes couldn't be higher. As merchant power plant developers cancel still more projects, and the electricity supply outlook for 2004 and 2005 worsens, the need for transmission upgrades increases dramatically. Consolidating generation and transmission siting at the CEC is an idea whose time has come.
Manufacturing Fact
Since 1992, California has seen its service industry create 1,211,000 new jobs while manufacturing has lost 147,000 jobs.
Talking Point
"Increasing taxes now on manufacturers in California is the wrong thing to do at the wrong time to the wrong industry."
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