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California Braces for Corporate Tax Hikes, Defense Cuts

PRESIDENT Clinton's proposed tax and spending plans will likely hit the largest state harder than any other region, economists here say.

Planned hikes in corporate taxes combined with cuts in defense spending will add to the woes of southern California's defense/aerospace sector. Pharmaceutical makers in the state's largest industry, health care, are expecting fewer profits in the wake of the president's criticism of drug-industry earnings. Energy-tax hikes are expected to take a big toll on retailers and farmers.

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But many gathered at a two-day economic summit here to deal with the state's worst recession since the 1930s are taking the news like a necessary slap in the face, responding in effect: "Thanks, I needed that."

"Clinton has come out with some very brutal news that will be particularly brutal for this state," says Sherry Jeffe, a political scientist at the Claremont Graduate School. "But I get a sense here that people are almost grateful that he was so direct and honest."

Even before his speech to Congress Feb. 17, Mr. Clinton told 550 state politicians, business executives, and lobbyists: "You will have to take the lead in improving your educational system .... You will have to take the lead in making sure your manufacturing and production is at least competitive with other states." He said his administration would do what it could, including helping California retrieve billions of federal dollars due the state because of an undue burden of immigration forced by federal guidelines. But he said that as the world's eighth largest economy, California is the engine, not caboose of the nation's recovery.

Participants are cautious about what coming sacrifices might mean for the state. Weak real estate markets and lack of new construction have kept California lagging, with an unemployment rate some two points higher than the national average. "The real question here now is whether these tax hikes and spending cuts will cause a situation where our nascent recovery will go back under again and cause a drag on the national economy," said David Friedman, a Los Angeles lawyer and former RAND Corporation economi st.

If Clinton focuses disproportionately on trimming aerospace research and development instead of personnel, California could be at an even greater disadvantage, Mr. Friedman says. Cutting too much, too fast in agricultural subsidies could cause havoc in farming communities. The state produces half the nation's produce.

Economists also feel that cutting mortgage interest deductions could be a "body blow" to a construction industry beset by the loss of about 300,000 jobs since 1988. Though the state has about 12 percent of the nation's taxpayers, nearly 17 percent of them make more than $100,000 a year, where the heaviest new tax burden is expected to fall.

Computermakers in northern California express concern about the proposed tax credit for business investment in equipment, thought to be about 10 percent. They complain it may not include such things as computer purchases. But the administration's apparent commitment to a nationwide computer "superhighway" could help bolster high-tech sales. So could a promise of a permanent research-and-development tax credit.

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There are other expected gains from coming Clinton programs: increased spending on infrastructure (reportedly up to $16 billion); new spending on job retraining and conversion of defense industries to commercial uses; and reductions in capital-gains taxes and other incentives that will flow to the state's small businesses.

"Clinton has made it very clear that he will help, but that it's primarily up to this state to dig itself out," said Daniel Schnur, communications director for Republican Gov. Pete Wilson.

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