Entrepreneurs Fret Over CA Business Climate

Dave Roberts
Contributing editor to CalWatchDog and long-time Bay Area newspaper reporter

Although California’s economy is finally picking up after seven years of recessionary blues, many small business owners continue to feel government is hurting more than helping them. That was one of the messages from entrepreneurs at a Feb. 11 hearing by the Assembly Committee on Jobs, Economic Development and the Economy.

Regarding the economy, there “is an optimism from small business that hasn’t existed in the past,” said Scott Hauge, president and founder of Small Business California. That’s shown in a comparison of SBC’s 2014 survey of California small business owners with preliminary results from the 2015 survey:

  • In the 2014 survey, 49 percent of respondents said California is going in the wrong direction versus 38 percent saying it’s heading in the right direction. In 2015 that has flipped to 48 percent saying the state is going in the right direction and 35 percent saying the wrong direction.
  • Last year 34.5 percent felt the economy was poor, with just 16 percent saying it was good. This year 49 percent believe the economy is good with just 13.5 percent saying it’s poor. Last year only 34 percent planned on hiring, versus 43 percent this year.

But when asked about California’s small business climate, the entrepreneurs mostly remained gloomy. In the 2014 survey, 63.5 percent called the small business climate poor, with just 10 saying it’s good. This year 60 percent still consider the business climate poor with 16.5 percent finding it good.

Their gloominess is borne out by the Tax Foundation’s 2015 Business Tax Climate Index. California ranked 48th overall in the country, a lowly position it has held for the last four years. The state was the nation’s worst in income taxes, 42nd in sales taxes and 34th in corporate taxes. Forbes Magazine’s Nov. 2014 business climate survey ranked California 46th in business costs and 43rd in regulatory environment.

Mac Taylor

Legislative Analyst Mac Taylor warned the committee members they need to be careful how their regulations affect the state’s business climate.

“Regulations … are crucial for business,” he said. “You want to always make sure they are smart, that they have good returns, that they are being efficiently done, that they are not excessive, that they are easy for business to follow. So the non-budget aspect is in some ways just as important to business as what happens in the budget. In some ways it can be more important to them.”

Several entrepreneurs pleaded with the committee members to make the state more business-friendly.

Cellpoint Corporation, which repairs cellphone screens, is headquartered in Costa Mesa. But its new manufacturing facility is located in Texas because the companies it serves are there, having been driven out of California, according to Cellpoint CEO Ehsan Gharatappeh.

“I’m always on the road to get this factory up and running,” he said. “It’s not convenient for me, my wife and kids. It would be in my interest to have a factory next to my house. Even if California were to eliminate the state income taxes tomorrow, that still would not be enough to put my manufacturing operations back in California – because all of our customers, Fortune 100 and 500 companies, are there [in Texas].

“In a perfect world, I would love to have some laws … to enable a competitive environment and marketplace in California, where big companies could move back to California and all of the small companies like mine that support them could follow in lockstep.”

Regulations

Key to making the state more economically competitive is to not impose punitive regulations, according to Hauge. “In some cases there are situations where regulations are put forth that the economic impact has not been determined,” he said. “That should be a criterion before regulations are put in effect, to know what the economic impact is.”

Dave Petree, CEO of Cloak and Dagger, a cybersecurity firm, asked for tax relief. “Have a program in place where you would waive state tax for the first two or three years for a startup business,” he said. “That would be contingent on the business staying in California for three years after that or all of the taxes become due.”

Two of the committee members were sympathetic to their concerns and requests.

“Unfortunately, we still have the nation’s third largest unemployment rate at 7.1 percent, which is higher than the national average of 5.5 percent,” said the committee vice chair, Assemblywoman Young Kim, R-Fullerton. “California consistently ranks at the bottom as a business-friendly state because of our high business tax climate. Too often California’s innovations become a reality in other states because we have too many hurdles and financial disincentives.

“By enacting pro-job policies, we can keep jobs and employers here and create more opportunities for Californians. As a Legislature, we need to be mindful of proposed policies that would hurt the economy, make it harder to increase jobs and threaten our future tax revenues. Together we should make it easier and less costly to start or expand a business in California.”

SBA

Donna Davis is the administrator for the U.S. Small Business Administration’s Region IX, headquartered in Glendale. Before the committee, she touted the many programs available to help small businesses. The SBA’s Local Assistance website is here.

Davis has been involved in small business herself. According to the SBA website, “She served most recently as the President and CEO of DIR Group, Inc., a business and advocacy consulting firm.  Before that, she was the CEO of the Arizona Small Business Association”

Also wanting to help businesses, especially small ones in her Inland Empire district, was Assemblywoman Cheryl Brown, D-San Bernardino.

Brown said she has been a small business owner for 40 years. And she responded to Davis’ testimony.

“You’re saying things I don’t know anything about,” said Brown. “We don’t seem to get that kind of support. We’re not seeing the kind of robust success that you’re talking about. Owners will go to the bank and try to get the loan cleared and so forth so they can go back to SBA.

“But the process is so cumbersome that many times small business owners won’t have the time to do that. Additionally, if they get through the maze, then we just don’t have access to capital in that region. That’s something I’m going to be working on.”

The state economy

In addition to his comments on the state business climate, Taylor’s 22-minute presentation provided an overview of the state’s economy and some legislative recommendations:

  • California’s gross domestic output of $2.2 trillion places it eighth in the world, ahead of Russia and Italy and just behind Brazil. Texas is the second largest state at $1.5 trillion. “It really just shows that California is an economic powerhouse, not only for the U.S. economy but for the world economy,” he said.
  • California lost nearly 9 percent of its jobs during the Great Recession – “that’s just astounding,” he said. It’s taken seven years to recoup those losses, nearly twice as long as the job recovery took after the 2001 recession.
  • Sixteen percent of California’s population is poor, according to the official poverty measure (based on data from 2011-13). That’s slightly higher than the national rate of 14.8 percent. But the percentage of Californians living in poverty is actually 23.4 percent when using the Supplemental Poverty Measure, which takes into account government benefits as well as cost-of-living expenses such as housing.
  • The cost of housing as a percentage of household income is higher in California than the national average of 23 percent. Southern California has the most expensive housing, led by Los Angeles at nearly 30 percent of income, followed by San Diego at 28 percent.
  • California is aging rapidly. The 65-74 age group is by far the fastest growing in the state, increasing by more than 60 percent from 2010-20. Next fastest is the over-75 age group, increasing about 35 percent. In contrast, the 24-and-under age group is declining by about 5 percent. “What that means is that it’s really good for your budgetary situation because you don’t have to spend a lot of money just to keep up with the growing population, building more schools, taking care of more kids,” Taylor said. “You can spend it on other things.”
  • California has a $650 billion investment gap in infrastructure over the next 10 years, according to the 2013 U.S. Infrastructure Report Card by the American Society of Civil Engineers, which graded California’s infrastructure a “C.” “Infrastructure is an area where we don’t do as good a job as we should,” said Taylor. “We have a five-year infrastructure plan that the governor puts out every year. But we don’t really follow through on it. The Legislature doesn’t have a strong planning process and a way to make sure that you’re spending your limited funds in the most effective way. You spend about $10 billion a year on average on infrastructure.”

The committee’s future informational hearings will look at specific components of the state economy, said Committee Chairman Eduardo Garcia, D-Coachella.

Cross-posted at CalWatchDog.

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