Killing the Golden Goose

Justin Adams, Ph.D.
President and Chief Economist of Encina Advisors, LLC, a Davis-based economics research and analysis firm.

“I’m a business person. I don’t need folks to start lecturing me on regulations and costs of doing business.” – Governor Gavin Newsom while addressing the Bay Area Council in 2019

The California economy is a sick patient, having been infected with Covid-19 back in March. While currently recovering from its recession, the economy is suffering from a high fever in the form of double-digit unemployment at 11 percent. It also is noticeably weaker. Yelp reports that over 39,000 California businesses on its site have closed due to the pandemic, and roughly half of these have closed permanently. The UCLA Anderson Forecast projects that a full recovery will not come before the end of 2022.

One might have expected that Gov. Gavin Newsom would emerge as a central force behind helping the state’s businesses to get back on their feet quickly. After all, Gov. Newsom wants and needs California to prosper. He boasts that the state is “the envy of the world,” repeating to audiences that we are home to the world’s fifth largest economy. Moreover, he recognizes – particularly under the shadow of an expected $54 billion budget shortfall – that the state’s economic growth is necessary to fund Sacramento’s many priorities, from education to health care to wildfire prevention. 

One might have expected him to exclaim: “This is an economic damn emergency. This is real and it’s happening.”

But there has been no such clarion call from the Governor to support the business community. Instead, it could be argued that he has provided the opposite message to Californians, by deed if not by word, even if putting aside his initial economic lockdowns from six months ago. While Gov. Newsom has undertaken a few positive efforts such as providing tax credits to small businesses and creating a high-powered economic recovery task force, these have been modest and, in the case of the task force, secretive. And at the same time, he has pursued others that promise to prove detrimental to the economy.

Consider for example the predicament in which Disneyland, one of Southern California’s economic powerhouses, now finds itself thanks to two of the Governor’s actions. First, Gov. Newsom and Health and Human Services Secretary Dr. Mark Ghaly issued guidelines on October 20 to govern the reopening of theme parks, guidelines that do not allow larger theme parks like Disneyland to open – even at dramatically reduced capacity – until their home county reaches Tier 4 (Yellow/Minimal Covid-19 Spread). This exceedingly high standard for Orange County and other large counties effectively puts the theme park industry in limbo, since no one has a definitive idea when it could be met. The Director of the Orange County Health Care Agency gave a guarded assessment, confessing, “Personally, I think that we can look forward to a yellow tier by next summer, hopefully. Hopefully.” In the meantime, analysts have estimated that the Disneyland resort to date has lost $2.2 billion in revenue, translating to $5 billion of foregone economic activity in Southern California, and these losses will continue to grow as long as the park remains closed. These guidelines led to the resignation of Bob Iger, Executive Chairman of Walt Disney Co., from the Governor’s economic recovery task force as well as to Disney’s announcement that it will have to lay off 28,000 workers across its U.S. parks due to extended closures from Covid-19.

Gov. Newsom could have demonstrated his entrepreneurial talent by crafting a negotiated solution with Bob Iger and other theme park CEOs weeks ago. A compromise would have allowed these parks to generate some basic revenue, or at least it would have provided greater clarity as to when they could. However, Gov. Newsom chose not to, which brings us to his second action.

Second, in September Gov. Newsom endorsed Proposition 15, the proposed “Split Roll” property tax increase on the November ballot. If passed, Prop. 15 would tax commercial and industrial properties based on market value rather than by modest annual increases, generating an additional $11 to $12 billion dollars in property taxes annually. In addition to impacting small businesses particularly hard, Prop. 15 would hit large landowning companies like, you guessed it, Disneyland.

Talk about kicking someone when they’re down.

How is it that Gov. Newsom can expect companies to generate no revenue but still pay more in property taxes? His actions are illustrative of a larger disconnect between Sacramento and the rest of the Golden State. Policymakers don’t see – or don’t want to see – that their actions have real-world consequences for businesses’ ability to employ workers, generate revenue and contribute to the larger economy. And, like the fable about the golden goose, for their ability to produce more and more golden eggs in the form of taxes. 

In fairness to the Governor, this disconnect started long ago. Data from the U.S. Census Bureau show that since 2001 state and local tax revenue in California has grown at a compound annual growth rate of 4.8 percent. Keep in mind that this growth rate even incorporates the large tax losses that occurred because of the Great Recession. This growth in state and local taxes significantly exceeded the 0.8 percent compound annual growth rate in the state’s population, the intended beneficiaries of these government services. Moreover, according to statistics from the U.S. Bureau of Economic Analysis, the compound annual growth in per capita state and local tax revenue (4.0 percent) exceeded the growth in California’s per capita Gross State Product (3.8 percent).

In other words, Sacramento’s demand for taxes is outstripping the California economy’s ability to produce them, all while businesses are slowly being suffocated. While Disneyland remains closed, it is clear that Fantasyland remains open in the state capital. 

 

Dr. Justin L. Adams is the President and Chief Economist of Encina Advisors, LLC, a Davis-based economics research and analysis firm.

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