Major tuition break OKd by Assembly Assembly OKs altering corporate tax to fund aid

Assembly Speaker John Perez, D-Los Angeles, right, confers with Assemblyman Roger Hernandez, D-West Covina, as the Assembly debated Perez's measure to close a corporate tax loophole and used the money for college scholarships, at the Capitol in Sacramento, Calif., Monday, Aug. 13, 2012. The measure, AB1500, eliminates a $1 billion tax break for out-of-state corporations and uses the money for college scholarships for families earning between $80,000-$100,000, was approved 54-25 and sent to the Senate. (AP Photo/Rich Pedroncelli) less Assembly Speaker John Perez, D-Los Angeles, right, confers with Assemblyman Roger Hernandez, D-West Covina, as the Assembly debated Perez's measure to close a corporate tax loophole and used the money for ... more Photo: Rich Pedroncelli, Associated Press Photo: Rich Pedroncelli, Associated Press Image 1 of / 1 Caption Close Major tuition break OKd by Assembly 1 / 1 Back to Gallery

Sacramento --

Middle-class students at California's public universities are one big step closer to receiving a major tuition break, after the Assembly narrowly approved a measure Monday that would fund college scholarships by eliminating a corporate tax break.

Democratic Assembly Speaker John Pérez, who has made the measure his top priority this year, needed the support of two-thirds of the Assembly because the legislation is a tax measure. He squeaked out the bare minimum number of votes by persuading two lawmakers from outside his party - Republican Assemblyman Brian Nestande of Palm Desert (Riverside County), and GOP-turned-independent lawmaker Nathan Fletcher from San Diego - to vote for the tax increase.

The measure fell one vote short at first Monday, when Assemblyman Tony Mendoza, D-Artesia (Los Angeles County), refused to join other Democrats in supporting it. Mendoza argued that the money raised by the tax should go directly to struggling universities, but ultimately said he would vote for the measure in the hope that it will be amended in the Senate. The bill then passed 54 to 25.

Pérez of Los Angeles may have a tougher time wrangling votes in the Senate, which has yet to consider the funding measure - but on Monday, he relished the victory in the lower house. Gov. Jerry Brown has said he will sign the measure if it reaches his desk, which would reduce tuition for qualifying students whose parents make less than $150,000 a year to less than what it was nearly a decade ago.

Calculating taxes

In approving AB1500, the Assembly voted to roll back a law that allows corporations to choose the less costly of two formulas for calculating the taxes they owe, and is believed to cost the state up to $1 billion a year. Under the bill, multistate businesses would have to calculate their California income tax liability based on the percentage of their sales in California - and not, as currently allowed, instead base their taxes on factors including property and payroll, which can result in a low tax bill for corporations that keep the bulk of their operations out of state.

The speaker noted Monday that some of the state's largest biotech and technology companies, such as Qualcomm and Genentech, "which employ thousands of Californians," support the measure "because they are put at a competitive disadvantage" by current law.

"This measure fundamentally speaks to the question of tax fairness for California businesses," Pérez said. He argued that the current system "effectively created a perverse incentive for businesses to create jobs outside the state of California."

Both houses passed another bill earlier this year that set up the technical structure for offering the aid to students whose families make less than $150,000, but too much to qualify for other grants. The bill that passed Monday is the follow-up to that legislation.

The corporate tax break that would be repealed was approved in 2009 by the Legislature as part of budget negotiations between Democrats and Republicans.

Republicans rankled

The proposed change incensed most Assembly Republicans, who said it would stifle economic recovery and exacerbate what they called a hostile business climate in California.

Assemblyman Curt Hagman, R-Chino Hills, said businesses can't make long-term plans and investments in California because policymakers "keep changing the rules."

"We don't have a lack of students going to the University of California and California State University - we have a lack of jobs when they come out," he said. "Until we make California competitive again, we will have that problem."

Fletcher, however, said the state isn't a competitive place for job creation because "we have a tax code that doesn't incentivize creating jobs here." He also said many GOP-dominated states have embraced the rules AB1500 would enact.

"At the end of the day, our obligation is to do what's right for the people we represent," Fletcher said. "I am sympathetic to the out-of-state folks, but I didn't get elected for their best interests. ... It's time for the Legislature to do what's right for the state of California ... (to) make California a more competitive place that actually creates jobs, and to make sure more children have access to the American dream."

Soaring tuition

Tuition at both the University of California and California State University systems has soared in recent years as lawmakers cut hundreds of millions of dollars from the higher education budget. It could rise even higher if voters reject a tax measure on the November ballot authored by Brown. A $500 million higher education budget cut will automatically take effect if that ballot initiative fails.

Under the plan that the Assembly passed Monday, students who qualify would see the cost of their tuition and fees drop by two-thirds.

It would amount to a $4,000 annual savings for California State University students and just over $8,100 for students attending the University of California, and would take effect as soon as this fall. Both new students and current students would be eligible if they do not already qualify for financial aid.

The corporate tax break targeted by AB1500 will also be put on the voters' chopping block this fall in the form of Proposition 39, which would eliminate it and use the extra money, in part, to fund alternative energy projects as well as the state's general fund. If Pérez's bill passes, Prop. 39 sponsors have said they would end their campaign.