“Taxes on capital, taxes on labor, inflation, bureaucratic regulation, minimum wage laws, are all – to different degrees – unnecessary slices of the wedge that stand between an individual’s effort and reward for that effort.” – Jack Kemp

During Governor Newsom’s November 16th press conference, where he announced that he would pull the “emergency brake” in the Blueprint for a Safer Economy and plunge almost all of California’s population back into the most restrictive tier, the Governor made a special effort to acknowledge the plight of small businesses. He explained that the coronavirus-wracked economy threatened the hopes, dreams and livelihoods of California’s entrepreneurs, and he pledged that the top priority of his January budget would be to “support our small businesses that are trying their best to weather this storm.”

This focus on supporting the state’s small businesses is much needed. According to the most recent data from the U.S. Census Bureau’s Small Business Pulse Survey (collected between November 9th and November 15th), 51.4 percent of California small businesses believe it will take more than 6 months before they return to their normal level of operations. Moreover, 2.3 percent of California small businesses have closed permanently while another 5.9 percent expect to permanently close in the next 6 months.

But is the state budget really the best vehicle with which to help California’s 4.1 million small businesses? In the current budget year, 91 percent of California’s $133.9 billion in General Fund expenditures is locked into spending on education, health and human services, and corrections, so there is not a lot left to repurpose. And while the Legislative Analyst’s Office recently reported that state tax collections are running $11 billion above projections, legislative leaders have already signaled that this revenue should be used to restore cuts to universities and state worker pay made in this year’s budget.

Consequently, any financial assistance from the budget, while certainly welcome, necessarily would be limited given already existing claims on state resources. As a case in point, the Governor just announced the launch of a rather small California Rebuilding Fund – involving “a $25 million anchor commitment and $50 million guarantee allocation from the California Infrastructure and Economic Development Bank” – intended to help the state’s smallest businesses.

If Gov. Newsom cannot help small businesses financially, he would do better to find other ways to support them. The most obvious action would be to allow them to operate and generate revenue by returning counties responsibly to less restrictive tiers. After all, the recent spike in coronavirus cases in the state has more to do with social gatherings than indoor shopping, gyms or other business activities.

Short of this, the Governor could look to more creative ways. Unfortunately his Task Force on Business and Jobs Recovery, which released its final report on November 20th, provides little actionable guidance. Here is the entirety of the Task Force’s recommendations for helping small businesses: “Expand Support and Provide Flexibility to Small Businesses – California should build on the impactful efforts to support small businesses, especially those owned by women and people of color and operating in economically distressed areas. Small businesses are the cornerstone for economic growth, and we must recognize that, in order to invest in our communities, we must invest in the people who make them vibrant.”

Amen to that.

Thankfully, the National Federation of Independent Business regularly surveys small businesses about their problems and priorities, and its July 2020 survey could spark some useful ideas for Gov. Newsom to pursue. Asked to rank 75 individual issues, California small businesses cited the following as their top five (in order): Cost of Health Insurance, Unreasonable Government Regulations, State Taxes on Business Income, Federal Taxes on Business Income, and State/Local Paperwork. While the Governor might not be able to influence the cost of health insurance or federal taxes on business income, he certainly can affect the other three.

Take unreasonable government regulations as an example. Gov. Newsom could provide flexibility to independent contractors and gig workers by leading the charge to repeal AB 5. Now that California voters have approved Proposition 22, a few hundred thousand ride-hail and delivery drivers join independent truck drivers and workers from dozens of favored industries as being exempt from the requirements of AB 5. That leaves the remaining independent contractors and gig workers – those without the political connections needed to obtain an exemption – facing an uneven playing field in the marketplace.

By prioritizing the removal of bureaucratic regulations like AB 5, as well as taxes on capital and taxes on labor, Gov. Newsom can truly support California’s entrepreneurs and help them survive the pandemic. After all, these are unnecessary slices of the wedge that stand between an individual’s effort and reward for that effort.


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