As Governor Schwarzenegger’s Commission on the 21st Century Economy considers a proposed overhaul of the state’s tax system, two reports released last month reinforce what many of us already knew – that California’s tax and regulatory burdens are driving businesses out of the state. The Tax Foundation, a non-profit, non-partisan think tank, unveiled its 2010 State Business Tax Climate Index (SBTCI) which had California ranked 48th out of 50 in business tax climate.
Another study, commissioned in a 2007 bill by Assemblyman Juan Arambula (I-Fresno), found that the total cost of regulation to the State of California is nearly $500 billion and 3.8 million lost jobs annually. To put that cost in perspective, the general fund budget for the state is around $100 billion each year.
While other states are attracting new investment, creating jobs and generating economic growth, the anti-business majority in California continues to operate in a vacuum. They seem to ignore the pleas from California companies, large and small, and operate with no regard for how additional regulations and increased taxes impact our revenue base, along with our standing among other states.
These reports bring to light a troubling fact that the business community has been aware of for some time – California puts itself at an economic competitive disadvantage because of its tax system and burdensome regulatory structure.
All ten of California’s closest geographical neighbors are in the top 30 of the State Business Tax Climate Index, with five of them cracking the top ten. Nevada, which has launched an aggressive marketing campaign targeting California businesses, has the fourth best tax climate in the nation. This should be a major cause of concern for state legislators, regardless of party affiliation, because these businesses drive the economic engine of California and generate the lion’s share of our tax base. Yet instead of implementing a tax system that encourages investment in our state – something that the Legislature has direct control over – most legislators seem content to make short-term fixes.
The best efforts put forth by the majority party thus far have been piecemeal tax incentives that amount to little more than band-aids while the state continues to hemorrhage jobs. They neglect long term solutions in favor of temporary measures that don’t affect the structural change that California businesses really need.
This isn’t to say that short-term tax incentives are not helpful. I worked closely with a bipartisan group of legislators, along with the Governor, in negotiating a film production tax credit in February to help curb runaway production to more business-friendly states. Since it went into effect in July, 26 films have taken advantage of about $60 million in tax credits. As a result, California will recognize over a billion dollars worth of jobs and economic activity. Tax incentives like this one are small examples of how California’s tax structure should function on a larger scale. Unfortunately we continue to treat the symptoms of our poor business climate, rather than the underlying cause.
2010 will be an important year for the future of California. We will elect a governor, we will conduct a census that will have a direct impact on the next redistricting, and in the legislature we will undoubtedly consider a number of measures aimed at reforming California. Among those reforms should be an effort to create a better tax system for our state. Whether that reform comes from the Legislature or from the Governor’s commission, the top priorities should be minimizing volatility of revenue and establishing a tax system that will allow California to compete for new business.