California’s Losing Tax Battle

By Michael Fumento

Investor’s Business Daily, July 22, 1992
Copyright 1992 Investor’s Business Daily

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To oil magnate Jed Clampett in the 1960s, California was the "place ya oughta be." But in 1992, many employers appear to be deciding that the advice given to the patriarch of the Beverly Hillbillies clan no longer applies.

A 1990 poll conducted by the California Business Roundtable found that 41% of companies in the state had plans to expand outside of California and that 14% intend to relocate outside the state.

There’s not really much choice for where he oughta be.

States throughout the southwest have offices that actively pursue disgruntled California businesses.

"They don’t like the congestion, they feel overtaxed, overregulated, the quality of life is a steady decline to which they see no end," said Rocky Scott, president of the Greater Colorado Springs Economic Development Corporation.

Some, such as the Center for the Continuing Study of the California Economy, a Palo Alto-based research group, say that the evidence of fleeing businesses is purely anecdotal.

As proof California is not losing jobs to other states, it points to nearby competitors such as Arizona and Nevada that have also lost jobs during the recession.

What this ignores, however, is that a state can have a net loss of jobs due to a national economic downturn yet still be siphoning off jobs from other states. In other words, if California businesses hadn’t relocated to Arizona and Nevada, California would have lost fewer jobs and the other two states more.

Further, a comparison only to other states ignores the growing role that Mexico plays as a magnet for manufacturers seeking a low-cost place to do business.

While there is no registry of businesses that have departed the Golden State, surveys have been done of businesses in other states to determine how many have come from California.

A survey last November of more than 500 new manufacturing facilities in the states of Nevada, Arizona, and Mexico conducted by Southern California Edison, a regional utility, resulted in an "exodus data base" that includes 160 confirmed relocations from Southern California alone.

Relocations to these three areas directly accounted for 21,000 jobs lost to California, Edison’s report said, "and probably an equal or greater number indirectly." It also said the 160 figure was probably low, since some companies consider moving information to be proprietary.

Jack Kyser of the Economic Development Corporation of Los Angeles County notes that some businesses that might have moved to California in the past are now deciding not to do so — taking away a major source of jobs that helped fuel California’s 1960s and 1970s boom.

"Go west, young man! But not all the way to California, maybe stop somewhere in Texas or Arizona or Nevada."

Kyser says that the jobs lost from businesses leaving the state may pale in comparison to those never gained because companies from other states don’t want to expand into or relocate in California’s uncompetitive business climate.

"It’s all behind the scenes," he said. "You just don’t know."

Kyser says that his group, doing detective work in all the states but not in Mexico, has so far completed a database of over 200 companies and 50,000 jobs that have left the state.

California businessmen cite a number of culprits — workers’ compensation costs that are among the highest in the nation, tort law standards that have led some to dub the state a "plaintiff’s paradise," skyrocketing healthcare costs, an insufficient transportation network, and crushing environmental regulations.

And, more and more, they are laying the blame at what has become one of the nation’s highest rates of taxation.

While new businesses can come to California from any state and can leave it for any state, California’s primary competitors other than Mexico are the southwest states of Texas, New Mexico, Nevada, Arizona, Utah, and Colorado.

Among these states, California’s corporate tax rate is tied for the highest, with Arizona, at 9.3%. Colorado and Utah have tax rates about half that, while Nevada, New Mexico, and Texas have no corporate taxes at all.

California’s state sales tax rate is the highest, at 6.75%. Colorado’s is lowest at 3%. California’s personal income tax rate also goes the highest, graduated from 1% to 11%. New Mexico’s is second-highest, with a top rate of 8.5%, and two of the southwestern states have no personal income tax at all.

Yet, if one California group gets its way, California’s taxes will climb even higher — especially those on businesses and their owners.

The Sacramento-based California Tax Reform Association, a group affiliated with public employee unions, has placed on the November ballot an initiative that, if passed, would raise marginal tax rates even further to 12% for those with income above $250,000 and filing separately, and $500,000 for those filing jointly.

The initiative would make the temporary 10% and 11% brackets permanent, enact a 3% tax on the gross value of each barrel of oil extracted in the state, increase taxes on banks and savings and loans, and boost the corporate tax rate from the current 9.3% to 10.3%.

"There is no credible position that California’s tax climate is a discouragement" to business, contends Tax Reform Executive Director Lenny Goldberg. Many businesspeople have told him that regulations are more of a burden on them than are taxes, he added.

"In fact," he said, California’s tax climate "appears to be an encouragement with our incredibly low property taxes."

The property tax in California is only 1% of assessed value. According to the California Taxpayers Association, California ranked 25th in the nation in per capita property tax collections in 1989-90, the latest fiscal year for which data are available.

The tax-hike initiative would effectively repeal key portions of Proposition 13 that relate to business, said Janice Behny, program director of the Los Angeles area Chamber of Commerce.

Proposition 13 now prevents assessed value from going up more than 2% a year, unless a house or business changes hands. But the tax-hike initiative would allow businesses to be reappraised every three years, allowing for much faster growth of the base on which they are taxed.

"Yes, property taxes are currently the ray of sunshine for the state’s businesses," said Behny, "but now they’re even trying to take that away."

>

When business taxes are high and rising.

As a whole, the new proposition would be "a disaster for business," she said. "It would impose $5.5 billion in new taxes on business. It has been dubbed "the job terminator" because of the impact it will have on those companies who are already reeling from the effects of the economy — [They]will either have to cut back on jobs or they will leave."

Behny said that the initiative might have appeal to many voters, because while the tax hike is designed to raise revenue overall, it lowers some taxes and reinstates a renter’s credit that was eliminated last year.

But, she said, "I think voters realize that jobs and businesses are leaving the state, and you have to have a salary to pay rent to be able to take a [renter’s] credit."

Already, California Business Roundtable surveys indicate that among businesses with plans to expand or relocate outside the state, taxes ranked higher than any other cause for these decisions.

Both the 1990 and 1991 surveys indicate that the level of business taxes in the state have a "bad effect" on their businesses — 73% in 1990 and 85% in 1991. Small businesses rated the "bad effect" higher than large businesses. Manufacturers rated the "bad effect" higher than non-manufacturers.

The electronics industry has been complaining about the California tax situation for some time now.

"I don’t think there’s any one thing that drives businesses out," said Theresa Casazza, director or State Government Relations for the American Electronics Association in Santa Clara, Calif. "But clearly (taxes are) a significant part of the decision to relocate or not come in. It’s just too expensive here."

"The nature of the electronics industry is that we can be anywhere. We don’t have to be here," she said. "[Electronics companies] don’t have to manufacture in the same spot they sell. And more and more we see headquarters leaving California and taking along the manufacturing and just leaving the salespeople here."

California businesses also don’t benefit, as those in other states do, from investment tax credits or sales-tax exemptions on equipment used in manufacturing.

California also is one of the few states that doesn’t allow full deduction of net operating losses, or NOL.

Under NOL, a company’s losses in one year can be used to offset profits in a subsequent year. Forty-three states allow a 100% deduction. California permits only 50% (outside of enterprise zones). And even that offset has been suspended during the recession, meaning companies can continue to accrue tax-loss credits against future earnings but can’t use it right now.

The 50% NOL is particularly onerous for electronics manufacturers, said Casazza, because "a good part of the electronics industry is cyclical in nature. Bringing products on line is much quicker than in other industries. You may have significant income in 18 months but no real profit in the first year of that."

On aspect of the NOL concept is that it allows a company to balance losses taken on one product with the gains made on a previous one.

One positive aspect of the California tax code, explained Casazza, is that it provides an 8% tax credit for research and development. "But now, we see that about 20 other states have a similar tax credit," she said.

Terry Ryan is a senior tax manager at Apple Computer Inc., which recently laid off 200 manufacturing workers in Fremont, Calif., while opening new manufacturing facilities in Colorado Springs, Col. Taxes were one of the factors that affected the decision, but not the only one, he said.

"We’re in a very competitive market," Ryan said. "Taxes are not the No. 1 driver in a relocation, but [they have] a way of percolating up when other things start to net out. California doesn’t match up very well."

"California doesn’t have the quality-of-life advantage that it used to," Ryan added. "I don’t think our legislators realize that. They still think people will come (simply) because it’s California."

California Gov. Pete Wilson is carefully avoiding the "T" word — taxes — because of flak he caught last year after approving a budget package that included almost $8 billion in new taxes on food, newspapers, alcohol, jet fuel, ship fuel, licensing fees, and incomes in the highest tax bracket.

Still, Wilson has made it known he is willing to accept a budget deal that would essentially siphon taxes from some non-state sources in order to fill a $6 billion gap in the state’s $56 billion proposed budget. This essentially would amount to a backdoor hike on taxes, including those on business.

One such plan is a budget conference committee agreement to funnel 50% of the net revenue of California ports into the state’s general fund, a move the shipping industry is fiercely resisting.

California businesses want to send a strong message to Sacramento.

Dwayne Lee, a public affairs spokesman for the Port of Los Angeles, explained that while his port has been profitable, the profits are earmarked for port expansion.

"Our plans for the next five years have us spending in excess of a billion dollars for construction, including borrowing through municipal bonds," he said, in order to keep up with a growing demand for port facilities.

"We have 200 acres of land now that is undeveloped, and our major expansion project is to dredge the channel in front of it ... to build new facilities for containers and coal exporting. It’s an enormous amount of construction dollars and jobs. Once they’re complete, you’ve got jobs for people operating the terminal."

But if the port’s profits are siphoned off, such building will be impossible, says Lee, unless the port sharply increases its fees.

If that becomes necessary, he said, the result would be shippers sending more of their goods to other ports on the West Coast or even to the East Coast.

Said Lee, "We think it will cause business to go away, jobs will be lost, the economic leverage that the port provides to the regional economy will be reduced substantially."


Read Michael Fumento’s additional work on economics.