Tax Law May Enhance Job Outlook

California economists expect the initial impact of the broad new federal tax reform program to be negative: Construction activity will slow, manufacturers will suffer and consumers won’t see the cash from their tax cuts for at least a year.

Paradoxically, all that bad news could be good news for the Southern California employment picture.

You almost have to be an economist yourself to follow the serpentine reasoning behind this conclusion. Bear with us.

The experts reason that a slowdown in commercial real estate construction will quickly bring down vacancy rates, lead to higher rents, increase landlord income and eventually impel a boom in new construction--and with it jobs. Thus commercial builders, who have been among the loudest complainers about the tax law’s restriction on real estate tax shelters, could benefit quite smartly from it.

Manufacturers, too, feel injured by the bill’s reduction in tax breaks for capital goods investments and the elimination of rapid depreciation schedules. But workers in these industries could benefit as manufacturers slow their purchases of new automated machinery and instead hire more workers to maintain production levels.

The measure, which President Reagan signed into law last week, is designed to benefit consumers by lowering tax rates for the majority of Americans, giving them more spendable income. However, the full benefit of the new tax schedules won’t be felt until 1987’s tax bills are paid in early 1988. So economists are not expecting a huge surge in consumer spending next year.

How can this help the economy? At least some economists believe that sluggish economic growth and slow consumer spending will force the Federal Reserve to continue to ease interest rates, thus heating up the economy and making credit purchases of cars, appliances and other major household goods cheaper. And the more consumers spend, the more jobs are created in the industries that produce these goods and in the retail businesses that sell them.

All these predictions, of course, are based on assumptions about how builders, manufacturers, retailers and consumers will behave as the new law takes effect. Most economists warn, however, that it is nearly impossible to isolate one factor--in this case, a change in the federal tax code--in predicting economic behavior.

“It won’t have a big impact on the overall number of jobs, but it might mean a shift from some sectors of the economy to some others,” said T. Anthony Quinn, director of California’s Office of Economic Research. “It’s going to take a long time for the real economic impact of tax reform to be felt, so we’re largely guessing now. But there’ll be a lot more tax accountants looking for ways to save their clients money.”

Quinn noted that tax reform at the state level--specifically, revision of the unitary tax, which imposes a heavy tax burden on foreign corporations operating in California--may have an equal or greater effect on the state’s employment picture than the federal legislation. The elimination of the unitary tax in 1988 is expected to attract foreign manufacturers that had stayed home or located elsewhere in the United States to avoid California’s levy.

Sony, for example, has already announced plans to build an electronics plant in San Diego County as a result of the state tax revision, Quinn said.

Quinn also said that two hard-hit California industries, semiconductors and agriculture, should begin showing new life as the value of the dollar drops, making prices of these products more competitive on world markets. Many of the California jobs lost in these fields in the last two years could be regained in the coming 12 to 18 months, he said.

Deborah Olivier, a researcher at the Claremont Economic Institute, explained how the new tax bill could have the unexpected effect of increasing manufacturing employment--at least temporarily.

She pointed out that this could be particularly advantageous to Southern Californians because Los Angeles County has recently overtaken the Chicago area as the nation’s leading region in terms of manufacturing employment.

“One of the key components of the bill is the removal of the investment tax credit and the lengthening of depreciation schedules. That reduces the incentive for manufacturers to purchase equipment, which tells you that to produce the same amount you will probably have to use more labor. It will tend to force manufacturers to lean more toward labor than capital,” Olivier said.

“It means more jobs. That’s the good news. Here’s the bad news: It also means very moderate to low pay increases, because you can’t have both more jobs and big pay increases. Either you raise productivity (by mechanizing), and get more per person and pay them more, or employ more people and pay them less.”

Olivier said this trend may hurt high-wage unionized workers and favor low-wage, low-skill job seekers. She urges unions to keep their workers’ interests foremost and not push employers for excessive wage packages.

“These are totally economic decisions (for employers),” she said. “If they (unions) insist on too high a wage, they will lose this opportunity.”

Employers, for their part, say decisions to expand production and create jobs are always complicated and take into consideration a large number of variables. It is next to impossible to predict which companies, or even which industries, are likely to put out the “Help Wanted” sign solely as a result of this tax bill.

At Litton Industries, the big defense and electronics company in Beverly Hills, employment levels have been fairly stable over the past year. Spokesman John Thom said the need for workers depends far more on demand for the firm’s specialized products than on changes in the nation’s tax code.

“We don’t see any particular impact at this time,” Thom said. “Our employment in California is more driven by the level of funding in the defense budget” than the tax laws.

Larry J. Kimbell, director of the UCLA Business Forecasting Project, said his studies show steady job growth in California over the next two years, outperforming the country as a whole, as California has for a number of years. In the past year, some 400,000 jobs have been created in the state, about 55% of them in the nine-county area of Southern California, he said.

Kimbell said he expects that rate of growth to continue, for reasons independent of tax reform, which he predicts will have an initial negative impact on overall economic activity in California.

“My gut feeling is that the front end of it is going to be negative. But it’s going to be worth it over five or 10 years. From a longer-term perspective, it’s going to be positive.

“However, those who will suffer from the bill will feel it first, before the benefits begin to be felt” by the majority of taxpayers.

Among those who will be hurt early will be real estate developers and wealthy investors, who will lose attractive tax benefits. Builders say the diversion of investment capital to other enterprises will lead to a slowdown in construction, which will cost jobs. But real estate economists note that Southern California has a two-year backlog of unused office space, so it can afford a period of slow building.

As that excess space is leased, however, the demand for new offices will grow and the real estate folks will be back in business.