One area I’ve been trying to get my colleagues on the other side of the aisle to focus on is the underground economy. Let me explain.
Let’s say you are a nonessential service provider. You have employees, for which you pay them competitive wages and salaries, because you want to retain them. And you withhold from their paychecks federal and state income taxes, SDI and FICA, which you match, because they only work for you and are common law employees.
You pay unemployment insurance taxes to the state and federal governments. You provide for family leave time. You pay for workers compensation insurance. You have charges for the payroll service and the quarterly payroll tax return preparation. You provide medical insurance, even if it may be partially reimbursed by your employees. You may even provide other benefits, which is a component of employee retention. Heck, if you’re a really great boss, you may even be providing some form of retirement plans for your employees.
Thank you for being an honest businessperson who is trying to earn a living and, hopefully, making a profit to support your own family. And, you’re paying income taxes to help make the state and federal governments meet their tight budgets.
Your competitor, on the other hand, hires undocumented individuals, also known as day laborers. And he uses legal residents who are deadbeat dads, those who refuse to pay child support, making it nearly impossible for their former spouses to make ends meet. He pays them all with cash, under the table. He doesn’t pay payroll taxes or provide workers compensation insurance. No medical insurance. No perks. Just cash. If he reported as wages to the state, the Franchise Tax Board would garnish the wages in order to make sure children were fed by paying down unpaid alimony. Your competitor underbids you every time you both submit proposals for possible contracts.
Recessions have a way of wiping out the honest contractors because their overhead is too high. If they’re lucky, they may have a contract with a governmental entity, which seems to be willing to pay market rates and above. But, even this route is fraught with barriers (and I don’t want to go there today). Otherwise, the work dries up and the available jobs go to those living in the underground economy.
With recent stock market gyrations, we know California will be hit by a lack of capital gains tax revenues, reportable income that results when wealthier individuals recognize gains on the sales of stocks and bonds. California will be hit by the lost wages of businesses temporarily shut down for the coronavirus. California will also be hit by honest contractors who will shut down or turn to the underground economy in order to survive.
This means less in income tax withholding and, ironically, unemployment tax revenues. At the same time, California will be paying out massive amounts in unemployment and welfare benefits, because these are the times when its residents need the state the most.
You can see how this house of cards starts to crumble. Gov. Gavin Newsom has been lucky. Until the last few weeks, he has seen only an uptrend. He will have to finally decide what is a need (fixed cost), what is a want (something nice to have when you can afford it) and what is a luxury item (like buying a piece of jewelry – nice to give to the partner – but not even close to being a true necessity).
My quote to the Associated Press has been picked up by a number of reporters around the state and country. One outlet was FOX KTVU in San Francisco. It concerned Newsom’s proposal to help undocumented immigrants during this crisis. My quote was, “I see the state of California and its budget as a house of cards and with this coronavirus-induced recession, I’m just trying to figure out where the money would come from. I would say helping undocumented would be a luxury item.”
Let me expand on that.
Where is California when it comes to those private sector employers who have risked personal fortunes to start and maintain a service of some form when it starts to dissipate? Where is their backstop when there is no one there to assist with a serious business disruption? Not even business property and casualty insurance policies are there to assist, as pandemics are not insurable incidents because there has been no physical damage. All the same, their doors are shut. And their cash reserves are dwindling.
During the Great Recession, I bumped into one of my former firm’s construction-company owners. When I asked how it was going, he sadly informed me he had to let go of all his 400 employees. Real people. Honest citizens. All in need of an assist.
When it comes to giving stimulus funds to undocumented individuals and illegal immigrants, speaking as an immigrant who came through the front door and as a former business owner for a larger accounting firm, I’d say, “Gavin, that’s a luxury item.” Let’s take care of the needs first. Then the wants. And, then the luxury items.
Gavin, let’s go after those who hired the day laborers and demand they pay for their food and shelter. It was the underground businesses that harmed the state’s honest businesses and willfully avoided taking care of the individuals that you are concerned about. Fix the system. Adding another burden on those who are following the rules is a tough pill to swallow.
Governor, your subtle remarks to contrast yourself from President Trump only makes you appear clueless as to all of the undercurrents occurring in the state’s real economy. Words mean things. It’s tough enough for the state to shut down so many businesses. It’s difficult for me to have the conversations with so many who are suffering financially. Especially when they provided you with more than $200 billion in revenues to be responsible for.
Sheltering in place should end soon. We have work to do and we want to get back to it.
John M.W. Moorlach represents the 37th District in the California Senate