latimes.com/news/local/la-me-fiorina-taxes-20101021,0,1161240.story

HP benefited from state tax breaks while Fiorina was CEO

The U.S. Senate candidate says California has a business-hostile tax structure that was a reason she outsourced thousands of jobs while head of Hewlett-Packard. Yet during her reign the firm was one of 21 that got a state sales tax refund even after having already offset some income tax bills.

By Scott Gold, Los Angeles Times

9:31 PM PDT, October 20, 2010

Carly Fiorina, who is staking her U.S. Senate campaign on her corporate record, contends that California's tax structure is hostile to business — one reason, she has said, that she was forced to outsource thousands of jobs when she ran Hewlett-Packard Co.

But while Fiorina was chief executive of the computer giant, the state was hospitable enough to grant the company a controversial $13-million tax refund even though, state officials said, it had already used credits to offset some income tax bills.

One of 21 firms that collectively received more than $80 million in sales tax refunds, HP was awarded $13 million in 2005, when the company posted net earnings of $2.5 billion. That year, California faced a $6-billion budget gap and slashed funding for public health programs, education and law enforcement.

In asking for the rebates, the companies cited provisions of a law that state officials said were designed to encourage small start-ups to invest in manufacturing equipment. Hewlett-Packard bills itself as the world's largest technology company.

A state tax board — four of whose members had received political contributions from companies including HP — agreed with the firms, overruling the advice of its own staff.

Tax records are not public, but state finance authorities said the companies sought the refunds after they had already "zeroed out" their state income tax bills. That can be done in a variety of ways, but many technology companies use research and development tax credits, among the more generous business incentives offered in California, to erase their income tax liability.

Taxpayer associations called the refunds unfair and labeled them corporate welfare — "a giveaway of taxpayer dollars," said Lenny Goldberg, executive director of the California Tax Reform Assn.

The tax credit "was abused," said former state Sen. Carole Migden, a Democrat and former chairwoman of the tax board. "California taxpayers were taken advantage of."

HP did pay payroll, property and federal taxes in the years for which a portion of its state taxes were excused, according to the finance authorities; and supporters said the exemptions were fair and deserved, considering the economic activity generated by such companies.

Fiorina spokeswoman Julie Soderlund said in an e-mail that "HP followed the tax laws of the state of California and California was, and continues to rank, at the bottom of states to do business in for many reasons, including its tax and regulatory structure."

HP officials declined to comment for this article.

In years before the vote, Hewlett-Packard made $20,000 in political donations to the four members of the five-member Board of Equalization who approved the tax relief, according to campaign records filed with the state. The board acts as a jury of sorts in state tax disputes.

Three of those members — then-chairman John Chiang, who is now California's controller; then-Controller Steve Westly; and former legislator Bill Leonard — said the donations had no bearing on their votes. The fourth, Claude Parrish, could not be reached for comment. The fifth member, Betty Yee, abstained from the vote and said this week that she had been "disappointed" by her colleagues' decision.

Soderlund's statement did not address questions about the donations.

Fiorina, 56, was named chief executive of Hewlett-Packard in 1999, making her, by some measures, the highest-ranking woman in the history of American business. The Board of Directors fired her after six years. She is now the Republican nominee in California for U.S. Senate, running against Democratic incumbent Barbara Boxer.

Fiorina's record at HP, which shed more than 30,000 jobs, by some estimates, while she led the company, has been a subject of debate in the campaign. Fiorina has maintained that she created more jobs than she eliminated, and she has blamed the company's outsourcing on California's business climate, in particular its taxes and thicket of regulations.

On the day she announced her candidacy last year, she said HP had "put jobs elsewhere in the nation and elsewhere in the world. And it is a demonstration of the fact that government policies can kill jobs. California today, as a state, is losing more jobs every day than are being created here. And that is because of the tax structure, the regulatory mandates that exist here."

HP, along with 20 other companies, had pressed the state to grant investment credits for equipment purchases. The appeal was made under a tax credit designed to recover some of the 250,000 manufacturing jobs that had been lost in California to the recession of the early 1990s.

HP sought more than $13 million in credits for purchases made in 1999 and 2000, Fiorina's first two years as CEO.

Some lawmakers and other critics of the board's decision said the law was not intended to provide the refunds to companies that had already used tax credits to cancel out their corporate income taxes.

Former state Sen. John Burton, chairman of the California Democratic Party, said the ruling "was an absolutely bogus giveaway of the people's money. That was never anywhere close to the intent of the legislation."

Chiang said in an interview that the board was "following legislative intent." Westly said in a statement that the decision was a "pro-jobs vote."

Leonard, a Republican who is now secretary of the State and Consumer Services Agency, agreed.

"HP had spent literally all of their profit on research and development and equipment — buying machines that, technically, put them into a non-tax-owing conclusion," he said. Without the additional tax refund, he said, "HP would have spent money on manufacturing — but not in California."

Carl Guardino, president and chief executive of the Silicon Valley Leadership Group, said the investment credit was one of the "puzzle pieces" California used to try to improve the business climate. HP is among the 325 companies that are members of Guardino's association; the group was created 30 years ago by a Hewlett-Packard founder to involve Silicon Valley executives in public policy.

Guardino said the business climate in California is akin to being hit by a car and breaking 30 bones and that not only was the manufacturing investment credit good policy, it was akin to fixing just one of those bones.

"The doctor set one bone — so why aren't I fine?" he said. "California has the equivalent of 30 broken bones when it comes to being competitive just with other states, much less other nations."

Burton said it was a fallacy that California is hostile to business.

"Companies open up here," he said. "People do business here. People get very rich here."

scott.gold@latimes.com

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