Happy Earth Day
Today is the 40th anniversary of Earth Day. In 1970 the public’s primary environmental concerns (although that word was hardly common usage) were pollution from smokestacks and tailpipes, oil spills, and misuse of pesticides. Forty years later, the public would be astonished at how much cleaner are industrial and automobile emissions, how rare are reports of oil spills, and not only the prevalence of organic produce and meat, but how safely pesticides are applied and how quickly they disperse from our foods.
But maybe most surprising to Californians in 1970 would be that the leading environmental issue of 2010 is … CO2 emissions. Credit lots of things, but not least is the amazing progress we have made elsewhere: reducing air and water pollution, toxic waste in the ground, and land and habitat acquisition – all while accommodating enormous population and economic growth.
California’s advantage
Amid the wreckage of California’s economy and our diminishing competitiveness, one California character trait abides: innovation and the prospect of cashing in on it.
According to a survey by the research firm VentureSource, fully 33 of the top 50 venture capital-backed firms (two-thirds), and 15 of the top 20, are located in California, a striking reminder that intellectual capital and innovation start right here. And since many of these firms are spinning off from research undertaken at our great universities, this drives home the importance of investing in a strong public university system for the future health of our economy.
The other take-away: only three of the 33 California firms are involved in what’s known as “clean tech.” In fact, more venture-backed firms were involved in health care than any other sector except technology. California has been a leader in health care innovation for decades, spinning off jobs and advancing medical treatments. But the equipment used to produce DNA sequencers, implantable devices for neurological disorders, or innovative orthopedic products (to name the technologies from just three of these top venture-backed firms) would not qualify for the proposed tax incentives aimed at the favored green sector.
This Cadillac is a Chevy
The national health care debate has many moving parts, but most of the friction is over how to pay for it. One of the new taxes proposed by both the Senate and the President is a “high-cost plan” excise tax: a 40 percent tax on the value of health insurance premiums that exceed a certain threshold of “high cost.” The tax would be levied against health insurers, but would very likely be passed on to policy holders.
As passed by the Senate, the annual thresholds were $8,500 for individual coverage and $23,000 for family coverage, beginning in 2013. The President proposed increasing the thresholds – to $10,200 and $27,500, respectively – but also postponed the effective date of the tax until 2018.
The stated purpose of the tax is to discourage “Cadillac” plans that are effectively subsidized by the income tax exclusion for employee benefits. Many conservative economists and elected officials have favored eliminating the tax subsidy for employer-sponsored plans and instead provide a tax deduction for the policy holder to help drive incentives and decision-making to the health care consumer. This proposal gives a nod in that direction by providing the disincentive, but no offsetting encouragement for consumers to take cost comparison into their own hands. In fact, it is nothing more or less than a revenue raising exercise.
A Long Way to Go
Maybe the optimists are right. The Governor has said “the worst is over” for the California economy.
But even if California has reached the nadir of our economic tumble, we’ve got a long way to go to climb back out.
The chart below tells the story (it looks worse than earlier versions since the employment numbers recently have been revised downward). Since the recession began in California in the summer of 2007, we’ve lost 1.3 million jobs – nine percent of employment. This is far worse than any other recession for the past half-century, but worse for construction (35% down), manufacturing (16% down), retail (12% down), and finance (14% down). The only sectors not seeing major job losses have been government (flat) and health care (up four percent).
Getting California back in the game
As the Governor and Legislature jockey over a “jobs agenda,” a bipartisan state commission has delivered a key building block for what could be the foundation of a new state economic development effort.
The Little Hoover Commission last week recommended the state re-create a high level economic development effort that can market the state, assist businesses wishing to locate or expand in California, and coordinate a statewide strategy of economic development strongly influenced by successful local economic development efforts. (The report can be found here. And a further disclaimer: I am a member of the Commission.)
After an exhaustive investigation and several public hearings, the Commission found the State is juggling a diffused collection of economic development activities, generally without authority. This has created numerous problems, including a void in leadership and accountability that diminishes California’s ability to coordinate activity and shepherd resources, a lack of capacity to promote, guide or align delivery of services, and a absence of an obvious point of contact in Sacramento for businesses, local economic development organizations or even other state-level actors to learn about and access state economic development programs, or find help to resolve permitting issues or navigating regulations.
It’s business as usual at the Legislature
The special session called to deal with the State’s fiscal emergency expired on Monday, and what has been the Legislature’s response? Business as usual.
Facing a two-year, $20 billion budget deficit, and urged by the Governor to implement more than $8 billion in spending cuts and revenue transfers this month, the Legislature is threatening to revert to form: raising taxes and using one-time solutions to pay for ongoing programs. (The “X8” below refers to the Legislature’s Eight Extraordinary Session.)
Item: Senate Bill X8 6 is awaiting final action on the Senate floor. It comprises an elaborate exchange of raising gasoline excise taxes and repealing the state sales tax on gasoline that would free up hundreds of millions of dollars in General Fund spending authority. But wait … there’s more. It would also – for one year – suspend some business tax incentives that would especially affect firms hard hit by the recession. The complicated transaction to raise some taxes and cut another ostensibly allows the Legislature to approve the measure with only a majority vote, since it is “revenue neutral.” But since thousands of income taxpayers would actually see their taxes increase, this is in fact a sham.
Government unions are focused
Campaign 2010 is up and running, if money transfers by unions are any indication.
Enormous deposits by labor unions into campaign accounts are just now being disclosed, and the depth of their commitment is becoming evident.
Item: The California Teachers Association has staked more than $660,000 to a proposed ballot initiative to repeal several business tax incentives passed by the Legislature in 2008 and 2009.
Item: Two more government employee unions have dropped more than $1.1 million into a proposed ballot initiative to remove the ability to subject certain tax and fee increases and other state policies to a voter referendum.
Look who’s behind the tree
By now you’ve heard that Oregon voters decided last Tuesday to tax themselves. If by “themselves” you mean “someone else.”
The election (actually, a referendum of legislated tax increases) decided the fate of two measures that were carefully targeted to maximize the ratio of voters to unpopular taxpayers. Measure 66 added two new brackets (10.8% on income over $125,000 for individuals/$250,000 for families; 11% on income over $250,000 for individuals/$500,000 for families) to Oregon’s basically flat income tax rate of 9%. Taxpayers in those brackets account for about two percent of Oregon’s income taxpayers, but is estimated to bring in $470 million a year. Measure 67 adds a new corporate tax rate (7.9%, from 6.6%), applying to business incomes over $250,000 and estimated to raise more than $250 million annually. The new top rates for the income and corporate taxes will partially sunset after four years.
Voters approved the Measure 66 by an eight point margin and Measure 67 by a six point margin. Typically, Oregon voters have rejected income tax increases by referendum, although none has been so carefully targeted as these. Oregon has no sales tax, and its property tax was limited by a vote of the people.
Colleges, prisons and crime
The Governor proposed in his State of the State address a constitutional amendment that would, beginning in 2014-15, limit prison spending to seven percent of the General Fund and guarantee higher education a minimum of ten percent of General Fund spending. The Legislative Analyst recently released a brief criticizing this proposal because it would “unwisely constrain” the ability of the state to set priorities, and is unnecessary because the Legislature can already shift funding among state programs.
The Governor made his proposal because of the disturbing and superficially symmetrical trends over the past twenty-five years: the share of the budget devoted to higher education (University of California and California State University) has declined from about 11 percent to 5.7 percent. Meanwhile, the share devoted to prisons has increased over the same period from about four percent to 9.5 percent.
California Job Recovery: Still Waiting
The California jobs picture remains discouraging. Data released on Friday showed that the unemployment rate for December remained at 12.4%, hovering around this same level for about five months. But nearly 40,000 jobs were lost last month, bringing California’s overall employment to a level not seen in more than a decade. California has shed more than a million jobs since the beginning of the recession, losing nearly seven percent of its employment base.
Job losses for this recession are still outpacing the last two California downturns, and we probably have not yet hit bottom. We’re two years into this recession: recovery from the 1991 defense realignment recession didn’t begin until the 34th month; job losses from the 1990 recession after the tech bubble didn’t bottom out until 28 months into the downturn.