Equipment tax is hobbling state’s manufacturers

California, which leads the nation in innovation, attracts no more than 1% of new manufacturing investment in the United States. Why? Because it double-taxes production.

By that we mean our state taxes both the production equipment and the product. California can attract new production investment if the state removes the tax that burdens manufacturers trying to grow. Assemblymember Tim Grayson and 11 co-authors have introduced Assembly Bill 1951, which would eliminate the sales tax on manufacturing equipment purchases in most cases.

Thirty-eight states already have dropped taxes on the purchase of manufacturing equipment because such taxes reward only service economies, and those state leaders know next-generation manufacturing will drive their state revenue, not low-wage service businesses. 

The bill, the California Manufacturing Attraction and Development Exemption, will discourage “invent here, build there” by encouraging the manufacturing of carbon-neutralizing products and equipment. This will help meet California goals of innovating on environmentally safe packaging products, mass producing life-saving therapies, and building a supply chain of products to achieve environmental goals. 

There is a misconception that all manufacturing is done by big corporations. In truth, 64% of California manufacturers have fewer than 25 employees. Manufacturing provides a gateway to the middle class, and each manufacturing job supports at least 2.5 others in the economy, with some subsectors, such as aerospace, supporting as many as eight or nine more jobs. 

One reason the bill is a priority among lawmakers focused on revitalizing California’s competitive economy is that it will put workers first by encouraging high-wage manufacturing jobs offering career opportunities. Manufacturing already supports nearly 300,000 jobs in the San Francisco Bay Area, with an average wage of $88,500.

Manufacturers, and especially small ones, are hampered in their ability to grow because of the high cost of scaling up production in California. 

For example, Bishop-Wisecarver, a small, certified female-owned manufacturer in Pittsburg (Contra Costa County), develops industrial automation technology. One piece of necessary machinery on the assembly floor can cost from $200,000 to $2 million. Today, purchase of that machinery is subject to state sales tax ranging from 7.25% to 10.75%, pushing higher the cost to scale up the business. (Some machinery qualifies for a partial tax exemption.) 

By dropping the tax on equipment, the bill aims to increase state tax revenues by dramatically improving California’s competitiveness. Long-term, tax revenue from jobs and investments will more than make up for any one-time tax revenue lost on the sales of manufacturing equipment. As it is, California collects little from this tax, as manufacturing equipment is purchased in states without equipment taxes. This bill would solve the problem.

To produce the new products society needs, it takes hard work, access to markets, innovative minds, a pipeline of talent and a state government that understands what a manufacturing company needs to make a long-term commitment. A 2020 report from the nonprofit California Forward, co-authored by the California Manufacturers & Technology Association, calls on state leaders to “provide incentives to scale (manufacturing) in California through loan guarantees, tax relief, government procurement, etc. This offer should be open to both domestic and overseas firms, as long as they manufacture in California or other locations in the U.S. Otherwise, American taxpayers will continue to subsidize research that creates wealth in other countries.”

Manufacturers want to partner with the state government to reach California’s bold leadership goals, including carbon neutrality, a sustainable economy, mandates specific to California, and reliable and affordable energy. 

Groundbreaking inventions and world-leading production advances can create California’s next generation of manufacturing supremacy, if we take one step toward tax competitiveness. Manufacturing growth means great things for Californians coming into the workforce over the next decade — if we repeal the tax on manufacturing equipment to make sure jobs will be available. 

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Robert Gutierrez has written previously about paying down the Employment Development Department’s debt, California’s economic future and tax increases. Lance Hastings has written about power shutdowns and recycling.