Calif. seeks to end loophole on foreign tax havens

[KingFlorez]

Calif. seeks to end loophole on foreign tax havens

By SAMANTHA YOUNG

SACRAMENTO, Calif.

California lawmakers seeking to give college students a break took aim Thursday at corporations that dodge taxes by stashing their profits in foreign banks.

The Assembly passed a bill that would temporarily close a loophole allowing companies to create tax havens in other countries.

Money generated by the move would not produce additional revenue for the state. Instead, it would allow California to reduce the state sales tax on college textbooks and supplies, giving a small break to students whose fees have skyrocketed.

"If you raise your revenues in California, you can't get away with not paying taxes simply by setting up a shell corporation tax structure in a tax haven," Assemblyman Ira Ruskin, D-Redwood City, said during the floor debate.

The 80-member Assembly narrowly approved the bill by Assemblyman Marty Block, D-San Diego, with a 41-28 vote. It now goes to the state Senate.

The loophole has long been targeted by Democrats. Because the bill does not technically add revenue to the state, it required only a majority vote to pass. Tax bills usually require a two-thirds vote.

Republicans characterized the bill as a tax increase that would encourage businesses to leave California.

"You're killing companies, you're discouraging everybody from coming to California, you're hurting the future of our children that we're trying to educate," said Assemblywoman Diane Harkey, R-Dana Point.

Corporations would pay taxes on offshore accounts only if the money was made in California, said Christopher Ward, Block's chief of staff. The accounts would be reported on a company's income tax return with the state Franchise Tax Board.

If signed into law, the bill would take effect on July 1, 2011.

It would reduce the state sales tax college students pay on books and supplies by 2 percent between that date and June 30, 2012. After that, the state tax would be eliminated altogether for college students, leaving them to pay only local sales taxes.

The California Franchise Tax Board estimated that corporations would pay a total of $70 million in additional taxes during the year following the bill's implementation. They would pay $120 million each fiscal year after that through mid-2014, and $50 million in the final year until the law expires in mid-2015.

Lawmakers would have to reauthorize the law if they wanted to continue closing the offshore loophole.

Gov. Arnold Schwarzenegger, who has pledged not to raise taxes, has not taken a position on the bill, spokesman Aaron McLear said.