Turning Recovery Into Prosperity: A Policy Agenda

Loren Kaye
President of the California Foundation for Commerce and Education

Adapted from CalChamber’s Solutions for a Strong Economy

Viewed from on high, the California recovery gained momentum in 2013. Per capita personal income has continued to increase, even after adjusting for inflation, for the fourth consecutive year.

For the first time the state’s gross domestic product topped $2 trillion, marking California as the world’s tenth largest economy. All sectors are improving, with manufacturing, information, finance and tourism ahead of the pack.

The statewide unemployment rate has dropped two percentage points in just 15 months while employers have added more than 300,000 jobs.

And tax revenues have begun rolling in to state and local government coffers.

If California were a single family, this would be unreservedly good news. But California is tens of millions of families, and the top line news of the recovery masks profound economic disparities within the state – geographic, ethnic, socioeconomic and occupational. California may be recovering its economic footing, but the fruits of that recovery are not yet widely dispersed.

California remains geographically segregated by economic achievement and opportunity.

More than ever there are two Californias, and they are not North and South. Coastal and inland California increasingly diverge: economically, politically and culturally.

Unemployment statewide has gone down by two percentage points in the past year, but a closer look reveals that coastal and Bay Area counties have an aggregate 7.5% unemployment rate, while unemployment in inland California tops 10.3%.

Of the 300,000 jobs created during the recovery has picked up steam, three-quarters have been along the coast or in the Bay Area.

Recovery has also discriminated among occupations. Between 2010 and 2013, higher skilled occupations, such as computer, engineering, and healthcare enjoyed increases in average wages of six to eight percent. Sports, entertainment and media occupations saw wage increases above 12 percent.

Lower skilled occupations, including building maintenance, food service, and personal care, limped along with one to three percent wage increases between 2010 and 2013. Jobs with a heavy government or nonprofit emphasis also saw low wage increases, such as education, public protection, and community and social services. Occupations in farm, fishing and forestry experienced actual average wage decreases during this period of economic recovery.

One of the strongest predictors of financial success and mobility, educational attainment has become stratified in California. Educational attainment is higher along the coast and in the Bay Area than in inland and rural counties.

For example, the majority of students in California public schools are Hispanics; California will be a majority Hispanic state by 2040. Yet while 30 percent of Californians have a bachelors degree or higher, only 11 percent of Hispanics have completed a four-year college.

Educational attainment and median earnings are closely related: areas of the state (again, primarily the coastal and Bay Area regions) where educational attainment is high are also those areas with higher incomes.

Another barrier to entry for the middle class is housing affordability. According to the real estate research firm Trulia, six of the seven least affordable housing markets for the middle class are in California, ranging from Ventura County, where 32 percent of the homes for sale were affordable for the middle class, to San Francisco, where the affordability rate was a mere 14 percent. In only three areas could more than half of the homes offered for sale within reach of the middle class: Bakersfield, Fresno and Sacramento.

Solution is systemic economic growth.

California policy makers should keep a simple focus on the number one issue determining California’s long-term prosperity: adopting public policies that will increase access to economic opportunity for all Californians and sustaining the recovery we already enjoy. Increasing certainty and reducing competitive disadvantages for job creators and investors can best accomplish this.

1.   Keep taxes on new investment and business operations low, fair, stable and predictable.

California has the highest personal income and sales tax rates in the nation, and the highest corporate tax rate among western states. While tax rate reduction would improve our competitive position, policy makers should above all resist making the tax climate worse.

·      Oppose punitive taxation that thwarts economic development and stability of investments, such as:

–          Discriminatory or punitive taxation of targeted industries or groups, including consumer products, services industries or high-income workers or investors.

–          Undermining or limiting tax incentives or equitable treatment for businesses, such as incentives regarding research and development or net operating losses.

–          Imposing a split roll property tax that increases rates or assessments of commercial and industrial property, including parcel taxes that differentiate among types of property ownership.

·      Increase manufacturing jobs  — California took an important first step to provide competitive treatment for California’s remaining manufacturing industry by exempting manufacturing and R&D equipment investments from the state portion of the sales tax. We should take the next step to exempt these job-creating investments from local and regional sales taxes.

·      Revive tax increment financing — Local economic development suffered a one-two punch with the elimination of both enterprise zones and redevelopment agencies. Though criticized for waste, abuse and inefficiencies, these tools nonetheless provided cities the ability to incentivize economic development in disadvantaged or rundown neighborhoods. Enterprise zones have been replaced by a temporary, narrower incentive, but cities utterly lack the tools to redevelop blighted or urbanized neighborhoods. Policy makers should revive the tax increment tool, with better monitoring and accountability.

·      Defend the two-thirds legislative vote for tax increases — No matter the partisan split in the Legislature, the two-thirds vote requirement for increasing taxes remains the surest check on overspending and growth of government. Hold the Legislature accountable to abide by voter-approved Proposition 26, which narrowed the definition of “fees” and requires two-thirds legislative vote or local approval of fees not connected to a legitimate regulatory program.

·      Address the $9.7 billion debt to the federal unemployment trust fund — Employers face ever increasing taxes to repay the federal UI debt. Any solution must not hinder job creation or continued economic recovery, be sustainable and equitably applied. The solution must also include significant changes to improve system integrity, attack fraud and overpayments, and appropriately align eligibility determinations.

2.   Reduce the regulatory and litigation costs of operating a business—especially when hiring and keeping employees.

Regulating the workplace is not free. The cost of adding new mandates or wage requirements, reducing flexibility in the workplace, or reducing the litigation bar is paid in less hiring, reduced hours of work or tightening the elements of employee compensation. Hardest hit: workers with the least skills or experience.

·       Adopt flexible work schedules — Provide flexibility to employees and employers by returning to a 40-hour weekly overtime rule, bringing the state back in line with the rest of the nation.

·      Enact systemic workers’ compensation insurance reforms to reduce costs and improve benefits  — California’s workers’ comp system comprises the worst of all worlds: high employer costs and relatively low benefits for injured workers. Support policies that create a balanced workers’ compensation system that both efficiently provides timely and fair benefits to injured workers and minimizes administrative and frictional costs to employers.

·      Clarify employee classification rules — Provide objective tests for employers to determine whether an employee is exempt or non-exempt, and whether a job is being performed by an employee or an independent contractor, which will help separate law-abiding employers from those operating in the underground economy.

·      Reduce excessive employment litigation — Reform strict liability labor laws that provide employee-only attorney fees and encourage class action litigation. Reform the Private Attorney General Act (Labor Code) that is used to pursue private litigation over trivial statutory violations.

·      Protect employers who rely in good faith on state agencies — Employers who actively seek out and rely upon information from government agencies on significant topics such as labor, tax, or insurance issues should have certainty that such information will be consistent and binding on all state agencies and that employers will not subsequently be held liable for punitive damages, interest, and attorney’s fees if a court determines the agency’s interpretation was wrong.

·      Advocate cost-effective implementation of federal health care reform — Support implementation of federal health care reform policies that expand access to health coverage for employees most cost-effectively while opposing expansion of health care policies that make health care coverage unaffordable.

3.   Reduce the cost and improve the certainty and stability of investing in new or expanded plants, equipment and technology.

Businesses that create high value jobs, such as manufacturers, R&D, information and finance, often have a choice of where to locate – nationwide and worldwide. These employers calculate the permitting and regulatory compliance costs and timeliness of decisions when deciding where to make new, job creating investments.

·      Reform and update the California Environmental Quality Act (CEQA)  — Small but significant changes were made last year in streamlining this notoriously difficult permitting regime. Further changes are needed to alleviate unnecessary expenses, delays, uncertainty and litigation traps associated with CEQA.

·      Minimize compliance costs of climate change law  — Ensure that any of the regulatory mechanisms to reduce GHG emissions, such as cap-and-trade and low carbon fuels, are implemented at least cost to the economy, without raising taxes and growing government. Before extending the current mandate beyond 2020, the Legislature should independently evaluate the cost and benefits of our current climate change programs and understand what has and has not worked.

·      Litigation reform  — CalChamber will continue to oppose efforts to constrain employers from using arbitration or other alternative dispute resolution; advocate appropriate limits on punitive damages; support proposals that curb frivolous lawsuits; clarify/streamline targeted procedural and substantive laws to ease compliance and expedite resolution of disputes.

·      Fix the consumer product ingredient regulation to make it workable for employers —  Also known as “Green Chemistry,” this regulatory program is intended to encourage the development and sale of safer consumer products in California. The Department of Toxic Substances Control should ensure its final regulations are limited only to those chemicals in consumer products that pose the greatest risk of exposure to Californians.

·      Improve the mechanisms used to list chemicals under Proposition 65  — Proposition 65 was designed to protect California’s drinking water from chemicals known to cause cancer or birth defects, and to warn members of the public about the presence of those chemicals in their environment to help them avoid exposure. The CalChamber will seek changes in the law to ensure only good science is used to make listing decisions, and support litigation reforms to discourage meritless lawsuits that harm businesses without protecting the public.

·      Improve policy analysis of new laws and regulations  — Aggressively enforce new rules requiring development of economic impact analysis of major new regulations. Institute retrospective reviews of certain current regulations for their economic impacts. Establish a comprehensive and dynamic economic impact analysis in the Legislature and the Executive Branch that analyzes policies before they are passed or adopted.

·      Aggressively pursue economic development opportunities  — The Administration should follow up on the reorganization of the Governor’s Office of Economic Development (GO-Biz) by instituting high-level interagency strike teams that will cut red tape and streamline permitting for potential business locations to and expansions in California.

4.   Invest in public and private works that provide the backbone for economic growth.

Job creation cannot continue without the public and private infrastructure to move goods and people, electrons and data, water and waste. All these works not only enhance the economy, they improve our quality of life and bind together our diverse state.

·      Expand the state’s energy infrastructure to improve energy reliability and affordability  — Ease barriers to building new, cost-effective electrical generation facilities and transmission lines, fuel terminals, and natural gas and petroleum pipelines. Ensure new environmental protection policies do not threaten energy reliability or affordability. Continue to oppose targeted tax increases on energy sources and bills to subsidize uneconomic technologies.

·      Continue improvement of State Water Project —   California is in the midst of a severe and extended drought. We must aggressively implement state policies to improve and finance water conveyance facilities and environmental improvements in the Delta, along with the development of additional water storage elsewhere in the state. Continue to oppose state-imposed targeted tax increases on water bills that do not benefit all water users.

·      Maintain, expand and improve the transportation network  — Implement policies, including increased financing, that continuously improve our transportation infrastructure, including highways, streets and transit systems. Also focus transportation infrastructure investment and environmental permit streamlining in the critical port zones and freight corridors to ensure goods move quickly to markets and minimize congestion.

·      Expand the use of public-private partnerships for infrastructure projects  — Provide additional and broader authority for public entities to partner with private entities to finance, design, build and maintain infrastructure projects.

·      Increase free trade  — Support free trade worldwide, expansion of international trade and investment, fair and equitable market access for California products abroad, and elimination of disincentives that impede the international competitiveness of California business.

5.   Ensure the availability of high-quality skilled employees.

Business leaders consistently report that California’s skilled workforce remains a strong competitive advantage. However, that status is threatened by the state’s disinvestment in higher education and the failure of many urban schools to produce capable graduates proficient for college or work. More generally, education is the ticket to economic opportunity and a prosperous livelihood – too few young Californians are getting that ticket punched.

·      Promote the development of a robust accountability system – Support the development of new, robust accountability measures that are compatible with the Local Control Funding Formula, hold schools accountable for attaining a minimum of grade-level proficiency for all students, and improve assessment systems.

·      Improve fiscal transparency and effectiveness — Improve disclosure of the costs of education and hold schools and districts accountable for their use of taxpayer funds.

·      Support post-high school options  — Make certain that high school graduates who do not pursue postsecondary education obtain essential learning and skills during high school, including career technical education, to ensure they are adequately prepared for the world of work.

·      Maintain a long-term financial and policy commitment to higher education  — California’s university and college systems are the envy of the world and a clear competitive advantage for the state. Investments in these institutions should be at the top of the public policy and financial priorities.

·      Advocate federal immigration reform — Support efforts to comprehensively reform U.S. immigration policy to meet labor demands, verify worker status, and provide greater border security.

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