Davis Approves 3 Tax-Shelter Bills

Gov. Gray Davis signed a trio of bills Thursday aimed at cracking down on tax shelters and the companies that use them.

The three laws close tax loopholes, tighten penalties for using illegal tax shelters and bar the state from doing business with companies that move their headquarters overseas to avoid paying state income taxes. The Franchise Tax Board estimates that the laws, which will go into effect in January, will boost state revenue by about $100 million next year.

Specifically:

* Identical Senate and Assembly bills signed by the governor as a package sharply increase the penalties for buying or selling illegal tax shelters and give the state more time to investigate suspect tax returns.

This law provides a brief transition period, which allows wayward taxpayers to come forward and pay past due taxes and penalties under the old system before facing vastly increased penalties under the new law, said Philip Wolman, tax partner at the Los Angeles law firm Buchalter, Nemer, Fields & Younger.

State officials estimate that the law will boost revenue by about $90 million both this year and next.

Revenue estimates decline somewhat for future years, when past tax bills presumably will have all been paid.

* Another law closes a loophole in tax laws that allowed banks to avoid paying taxes by transferring assets into so-called regulated investment companies.

State officials estimate that this law will boost state revenue by $10 million in the first year it is enacted.

* The third law bars the state from contracting with any company that moves its headquarters to a tax-haven country to lower its tax bill -- a practice known as expatriation.

Franchise Tax Board officials have estimated that California will lose $132 million over the next 10 years to expatriations that already have occurred and would lose significantly more if the trend continues.

The bill does allow the state to do business with offshore firms if the companies agree to abide by California’s corporate laws, provide shareholder protections that often are lost when companies incorporate in tax havens such as Bermuda, and pay their California taxes.

“These expatriate companies want the benefit of operating here but are unwilling to face up to their responsibilities,” said state Treasurer Phil Angelides, who helped push the legislation.

“This corporate conduct is particularly unconscionable at the very time when our state is struggling to cover the costs of police, firefighters, education and mental health.”