Classroom vs. Boardroom: Economic Theory and Reality Collide in CaliforniaPosted by Greg Hines, Legislative Director, Tax & Corporate Counsel on Oct. 16, 2009
The 2008-09 budget cycle will long be remembered as a tipping point in California's economy. But will we learn from it, or will the state repeat mistakes (or make new ones as the case may be) that will continue our long-standing hold on the precipice of economic collapse?
As California stumbled into 2009 having "solved" a budget crisis just three months earlier that proved to be no real solution, the Governor, teaming with the Democratic leadership, formed California's Commission on the 21st Century Economy, a commission who's purpose was to evaluate the state's outdated and volatile tax system in hopes of bringing some measure of reforms, and with it stability to the state's revenue stream. After 9 months, the final product provides no more answers to the state's ills than the current system, in fact, creates even more uncertainty and unpredictability. What it does do however, is provide an opportunity for a classic battle between academic economic theory versus boardroom/dining room economic realities.
We applaud the commission for their efforts and contributions to this seemingly herculean task of reforming the state's tax system. I believe that most everyone understands and agrees with the fundamental need for reform. Unfortunately, that appears to be where the similarities of thought end.
As the Assembly Revenue and Taxation Committee conducted informational hearings on the Commission's proposals end of last week and yesterday, it became even more clear that stark contrast of the academic exercise conducted by the Commission versus the economic realities of the state's economic base. During testimony last week, former Assembly Speaker and current commissioner Curt Pringle recognized that there were many industries and taxpayers that would be adversely affected by the proposal, but suggested that it was "not the Commission's job to look at the impact of their decisions on various industries or taxpayers, but rather very basically to look at a very finite, static view of volatility." Unfortunately, it is this very narrow view that has led to today's current chaos.
The Commission has ignored what is likely the single most important component of California's revenue stream, the effect on the taxpayer. The most significant contributors to any economy's volatility are the decisions made in high-wage company board rooms (i.e. manufacturers) and at family dining room tables (i.e. manufacturing employees averaging $66,000 wages).
The Commission's economic theory related to the Business Net Receipts Tax (BNRT) proposal suggests that any such tax increase can be passed through to consumers or to internal cost reductions in the form of salary and benefits cutbacks. Economic realities in day-to-day boardroom, tax department and dining room family budgeting discussions suggest the opposite however. Our domestic and global competition gets tighter every day. California produced products are either faced with raising prices to uncompetitive levels, or internalizing the cost, affecting already razor-thin margins. In other words, reality steps in and suggests that California companies will be placed at a significant disadvantage.
While having admittedly struggled over the past decade, California manufacturers still employ 1.35 million Californians with an average annual salary over $65k (over $20k more than a comparable service economy job). The industry also carries a multiplier jobs effect of 2.5, higher than almost any other industry. It is not a far stretch to understand that continuing to implement policies (even under the cloak of "reform") that provide further erosion of California's manufacturing and research & development base is the clear path to increased volatility, not less.
Statistically we know we've already lost 31 percent of our manufacturing base in the last eight years. Perceptively we know that California's nascent trend of lost high wage jobs and irretrievable opportunity for growth is now becoming a noose around the neck of our economy. Anecdotally we know a large tax increase on business will make our manufacturers less competitive. Because California is so dependent on a wide range of production based jobs, allowing a reform proposal to go forward that has the potential for significant harm to this industry seems perilous to California's economic well-being.
CMTA strongly encourages the legislature to utilize the resources and experts available to them to fully evaluate the economic impact of implementing these proposed reforms. Otherwise, the Commission's attempt to reduce volatility in the tax system could create significant volatility in the state's industry base, and thus a draconian and potentially irreversible erosion of California's economy. This is one theory California cannot afford to test.
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