Informing & Monitoring
» Capitol Updates
» Leg. Watch
» Press Releases
» Leg Vote Record
» CA Cost Index
» Features
» Audio & Reports
» Job Data
» Calendar
» Coalitions
» Fed Update
» Policy Objectives
» Policy Principles
Membership
»Membership list
»Invest in CMTA
»About Us
»Yellow Pages
»Questions?
»Join Committees
»Advertise
Services & Discounts
»Group WC Program
»Discount Programs
»Training
Directories
»CMTA Staff
»Send us e-mail
»Directions to CMTA
»Rent Conference Room
Grassroots Activism
Sign up to receive action alerts
Empowering manufacturers to lead the way
CMTA Vice President, Dorothy Rothrock, Testified
on October 10 before a Senate Informational Hearing in Oakland on
California's Economic Development Policies
 "We need to start with the state's problems and try to fix those programs already in place. We can do that without affecting the General Fund," said Dorothy Rothrock alongside Dominic DiMare.  State Senator John Vasconcellos and Secretary of Trade & Commerce Secretary Lon Hatamiya |
Introduction
Thank you for the invitation to speak at your hearing of the Senate Select Committee on Economic Development. I appreciate that your committee will be discussing California’s economic development strategy.
California suffered a severe recession in the early 1990s. California’s response to this recession should serve as a starting point as we develop solutions for the current economic downturn and looming state budget deficits. At that time, Governor Wilson convened the Council for Economic Competitiveness lead by Peter Ueberroth and you formed the Assembly Democratic Economic Prosperity Team. From those efforts, a combination of spending cuts, tax increases and business stimulus were embraced in the last decade to overcome the state budget deficit. CMTA’s testimony will focus on the need for business stimulus as a key component to solving the states’ fiscal problems.
California Business Climate
The first step in the analysis of what stimulus measures we should adopt is to look at the problems and opportunities in the California economy as a whole. We should understand the underlying factors that work for and against our ability to enjoy increased tax revenues through economic growth and increased employment.
The most important fact that we urge policymakers to face is that California is a very expensive place to do business, averaging 32% above the national average. The Milken Institute report entitled “Manufacturing Matters”, submitted for the record today, describes the economic impact of such high costs, including the link between high costs and reduced economic growth potential.
California’s high costs hurt those businesses that are the most sensitive to cost pressures. This includes manufacturers competing in global markets for the sale of their products. A local service company may be able to pass along the costs of doing business in the price of their products, but firms producing commodity products competing with lower cost regions can’t raise prices without losing sales. For this reason, California’s dynamic technology manufacturing sector, the engine of growth in the last decade, will not fully recover from the current recession so long as it is cheaper to manufacture and assemble computer components in other states and countries.
As a result of the high cost of doing business, California is now losing it’s manufacturing base at an alarming rate. The numbers speak for themselves - since January 2001, California has lost 164,000 manufacturing jobs, or nearly 10% of its industrial workforce.
Why Manufacturing Matters
We should care what happens to manufacturers in California because they employ California workers that are paid, on average, $25,000 more per year than a service sector employee. This income helps support a middle-class lifestyle, home ownership, or the ability to send sons and daughters to college. In addition, the economic multiplier effect of each manufacturing job is 2.5, the highest of any type of job. Thus, when California loses one manufacturing job, two and a half jobs in other sectors of the economy also disappear.
Impact of High-Costs for Manufacturers
We believe that the high wages paid for manufacturing jobs, the high economic multiplier effect of each manufacturing job, and California manufacturers’ vulnerability to high costs make them an important target for business stimulus measures. The following cost areas are the most important for California manufacturers:
Electricity
Manufacturers in California are more energy intensive than other sectors of our economy. Electricity makes up 15% of the cost structure of an average manufacturer, but the range of intensity can vary from 5% to 80% depending on the characteristics of each industrial process. For this reason alone, the impact of the California electricity crisis threatened to hit manufacturers harder than any other business sector.
However, California policymakers added insult to injury by making the political decision to protect residential and small commercial customers from large rate increases, and instead shifted a high portion of the increased electricity costs to manufacturers. Average residential and small commercial increases ranged from zero to 25%, while manufacturers got hit with 50 to 87% increases! Thus, the impact of the crisis was magnified for manufacturers for three compounding reasons - their vulnerability to cost-pressures due to global competition, the cost-shift to manufacturers to avoid politically unpopular rate increases for residential customers, and the energy intensive nature of process manufacturing.
The move by many California manufacturers to sign direct access contracts for electricity rather than suffer the large rate increase imposed at the CPUC has temporarily forestalled the full impact of higher prices for those businesses. If and when the CPUC imposes exit fees on those companies, expected to be on the order of 2.7 cents per kwh for the next decade, there will likely be job losses and plant closures for the reasons stated above.
Wages
The single largest cost factor for most California businesses is wage related, approximately 50% of total costs. California costs are nearly 17% above the national average, and the cost burden just got bigger, with a $3.5 billion increase in worker’s compensation benefits and a $4.5 billion increase in unemployment insurance benefits. The workers compensation benefit increases came with estimated savings associated with modest reforms that may never materialize due to budget cut-backs at the agency and other factors.
Tax Burden
California’s tax burden is 23% higher than the national average. It is notable that California’s tax burden increased by 3.8% at the same time that all other western states saw significant declines. In addition, the recent California state budget bill included a suspension of the net operating loss carryforward for two years, a $1.2 billion hit on businesses who have suffered recession related operating losses or have made large investments and are not showing a profit. These unprofitable and struggling companies are the least able to withstand additional cost pressures associated with unfair tax treatment, yet California chose to help balance the state budget on their backs.
The Justification for Economic Stimulus Measures
Economic stimulus could be achieved by a reallocation of costs to reduce electricity rates, substantial reform to reduce costs in the workers compensation system without reducing benefits, and creation of a tax system that promotes industrial expansion. These policies would stimulate investment, increase employment and help fill state coffers through increased tax receipts. This would be achieved without any cost to the state general fund.
CMTA has a long history of advocating for direct solutions to the cost problems for manufacturers and other businesses. However, as described above, we have seen the cost burden grow larger, not smaller, in the last few years. The result is the dire straits we now find ourselves in, a staggering budget deficit, a languishing economy and 164,000 fewer manufacturing jobs.
CMTA believes the economic and state fiscal problems will not be solved without a frontal attack on the high costs that are driving the economy into the ground.
However, we are not optimistic that policymakers are willing to address the problem in this manner, for the same political reasons they originally imposed these policies. Therefore, assuming that immediate cost relief will not be forthcoming, other types of economic stimulus measures should be employed by the state. Tax incentives, such as the Manufacturing Investment Credit, was passed in 1993 to help address the last economic downturn. It had the effect of reducing tax revenues to the extent of the credit, but economic growth during the later years of the 90’s more than made up for the cost and state budget surpluses reached historic highs.
The Value of a 5 Cent Sales Tax Reduction on Manufacturing Equipment
During this economic crisis, CMTA is advocating for cost reductions in wage and energy costs, as well as a 5 cent reduction in the sales tax on the purchase of machinery and equipment used in manufacturing, research and development and telecommunications. The Milken Institute report shows that the early year costs to the general fund are outweighed by the out-year benefits of such an incentive. The value of the incentive was proved by Milken through the REMI model, a widely-used method of measuring the economic value of tax policy changes. The REMI apparently shows a more dynamic effect than the model typically used by the State Department of Finance to measure the cost/benefits of tax incentives. The debate about the true value of such an incentive is ongoing. Without resolving that question here, let me note three important factors that should be considered by policymakers as they debate the value of a particular tax incentive.
First, the public perception value of keeping an existing business rather than letting it flee to nearby states or other countries should be factored in the value of the incentive. A viable package of economic stimulus measures may encourage CEOs and other business executives not to “give-up” on California, even if they do not take advantage of the incentive. The news is so bad about California that now 57% of the site selectors for Fortune 500 companies believe California is the worst place in the country to do business. This negative perception not only keeps companies from moving to California, it also fosters a let’s wait and see attitude on the part of existing companies as they ponder expansion strategies to serve their global markets. Our members have told us that there is a two to three year window of time in which executives will put up with high costs and a hostile regulatory environment, and if they see no improvement beyond this horizon, the process of downsizing or moving from the state will begin.
Second, another piece of the analysis should be to understand how a particular incentive will encourage the type of expansion or business retention we desire. The retention of a manufacturer that employs low-skilled workers, provides a high-level of workforce training, and provides high wages provides societal benefits that go beyond the dollars and cents cost to the general fund in a static analysis. The declining middle class and the resulting “barbell economy” creates an unhealthy and perhaps unsustainable economy for California.
Finally, the important role of manufacturing in the process of innovation and economic growth is not well-understood. Tax incentives to keep California manufacturers healthy will encourage companies to keep their research and development, design engineering, and product innovation functions here as well. The Milken Institute report describes the value to a company of keeping the manufacturing functions in close proximity to the intellectual work of the company. Milken researchers fear that California policymakers will not address manufacturing problems and drive them from the state, erroneously believing that the high-end R&D will stay.
Conclusion
Other states are actively and openly competing for California’s businesses, targeting those with the most desirable economic, environmental, wage, or other characteristics. They offer lower costs of doing business and they will often offer to pay the relocation costs in the form of tax breaks or other incentives.
California manufacturers are attractive targets. To survive in our state, they have had to become, on average, 32% more efficient than their competitors in the rest of the country. They have had to survive stiff environmental regulations and conduct business in a state with strong consumer protection standards and an active plaintiffs bar. Those that remain have made a bet that it will get better in California, but they will have to convince management and shareholders that there is justification for this belief, that there is a light at the end of the tunnel.
Our current fiscal and regulatory policies are telling manufacturers loud and clear that we don’t want them to stay in California, that they should take the better offer. CMTA urges this committee to send a different message, that we value their contribution to California’s economy and that government will be part of the solution, not the cause of problems, for manufacturers.
Thank you.