US Supreme Crt Worsens Calif Budget Deficit Crisis-Paper

NEW YORK -- A refusal by the U.S. Supreme Court on Monday to review a California state court ruling on corporate taxes could increase the fiscally ailing state's budget deficit by about $650 million, the Los Angeles Times reported in Tuesday's edition.

The state will have to pay $800 million in refunds to between 1,000 and 2,000 corporate taxpayers having out-of-state dividend income, the state's Franchise Tax Board said, according to the newspaper.

That would include some of the largest corporations doing business in California, such as Microsoft Corp. (MSFT) and Hewlett-Packard Co.(HPQ), it said.

But the state could collect $150 million in new taxes from companies that had been receiving a tax break since 2000, the Times reported, citing a board spokeswoman.

A California law had allowed corporations to deduct from their taxes dividends received from other corporations, as long as those dividends were paid from corporate income taxed by California, the newspaper said.

The deduction provided an incentive for firms in the state to invest in other in-state companies without being taxed twice, but state courts said it violated federal interstate commerce laws. That was the decision the Supreme Court refused to review, thus letting it stand.

The case was brought by Farmer Bros. Co., a Torrance based coffee roaster and packager, the Times said. The company said the law was discriminatory in that it provided "a deduction for income generated in California but not for income generated from other states."

The newspaper said Schwarzenegger administration officials haven't decided where the money for the refunds will come from.

"We're going to have to account for it when we present our revised (2004-05) budget in the spring," the Times quoted California Department of Finance spokesman H.S. Palmer as saying, but Palmer added the entire $650 million won't have to be paid in one year and may go out over two years or longer.

California already faces an accumulated deficit of about $17 billion and is banking heavily on voter passage of a $15 billion revenue bond issue on March 2 to help it pay off $14 billion of notes coming due in June.

   -By Stan Rosenberg, Dow Jones Newswires; 201-938-2143;
stan.rosenberg@dowjones.com

Updated February 24, 2004 2:08 p.m.