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AP_Ted_Lieu_2012.jpgLegislation that would partially reinstate a tax break for investors in small California companies cleared the state Senate on Thursday despite complaints from some senators that it doesn't go far enough and others that it goes too far.

The tax break - a 50 percent exclusion from state income taxes on capital gains from investments in certain businesses - was enacted two decades ago, but a state appeals court last year declared it unconstitutional because it limited the benefit to California firms.

The Franchise Tax Board then declared that taxpayers who had taken advantage of the break in recent years would have to repay the tax savings, plus penalties and interest. That generated an outcry from business groups that said the move would discourage investment in job-creating business.

Sen. Ted Lieu, D-Torrance, introduced Senate Bill 209 to reinstate a modified tax break and protect those who got the tax savings from the repayment demands.

However, when the bill reached the Senate Appropriations Committee, Senate leaders forced Lieu to take amendments that reduced the break to 38 percent, thus compelling taxpayers to make partial repayments, but also waived penalties and interest.

The change drew criticism from some senators who said it would penalize taxpayers who had complied with the law, and discourage investment. Others said it went too far.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, acknowledged his involvement in the change and said the modified bill was an effort to compromise on the conflict and avoid a $40 million hit on the state treasury by investors who would claim the tax break retroactively.

"If we don't do this bill, they won't get anything," Steinberg said.

The bill passed 34-3.

PHOTO CREDIT: California state Sen. Ted Lieu, D-Torrance, talks on the Senate floor in Sacramento. Rich Pedroncelli / Associated Press


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