CLINTON’S ECONOMIC PLAN : State to Feel Full Effect of Changes : Economy: Clinton’s proposed tax and spending plans are likely to hurt Californians more than other Americans--but they may help more here too.
Perhaps more than any other region, California and its recession-weary economy will feel the weight of President Clinton’s economic package: Budget cuts could do more damage to key industries, while new incentives could be the best shot in the arm to revive the state.
Proposed spending cuts would particularly hurt aerospace and agriculture. Proposed income tax increases could especially hurt Californians, who make up a larger share of the nation’s high-income households.
Still, if the program succeeds in pulling the nation’s economy up at a sufficiently strong rate, that could drag the state up with it, whatever the fallout in individual economic sectors.
“If the nation succeeds, we succeed,” said economist Robert Arnold at the Palo Alto-based Center for Continuing Study of the California Economy.
One thing is clear: The state’s economy continues to languish in recession--because of defense cuts, a weak real estate market and lack of new construction--though economic recovery seems to be taking hold in the rest of the country.
Clinton’s proposed economic program, to be unveiled today, is expected to couple tax increases with spending cuts to reduce the deficit, and is likely to include new investment in such things as road construction to stimulate the economy.
Clinton himself seemed sensitive to California’s peculiar situation.
On Tuesday, he addressed the economic summit meeting at the Biltmore Hotel, saying he would do what he could to help the state pull out of its recession.
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Economists--including some attending the summit--agreed that the effects of Clinton’s plan would depend on the details. But many believed that California would be most hurt by the following:
- Proposed cuts in defense spending could hasten the decline of the state’s aerospace industry, particularly if the cuts focus on hardware and not on base closures or personnel.
- Cuts in agricultural subsidies could harm certain sectors of the state’s enormous farm industry, especially for growers of commodity crops such as wheat, cotton, rice and sorghum. Cuts in water subsidies could also affect drought-stricken growers.
- A proposed increase in corporate income taxes would add to the already considerable tax burden on state businesses.
- Californians also stand to suffer more than other Americans as a result of a wide-ranging increase in personal income taxes, particularly if the heaviest tax burden falls on those who make $100,000 a year or more, as the President suggested in his Monday speech.
The state has about 12% of the nation’s taxpayers, but 16.5% of those taxpayers who make more than $100,000 a year, according to Internal Revenue Service estimates.
“A hundred-thousand dollars a year may seem like an awful lot of money in Arkansas, but it’s a pretty middle-class family income in California,” economic writer Joel Kotkin said. “If you drastically increase taxes on people who make $100,000 or $80,000 a year in California, you may have a depressing effect that is much greater than the total stimulus, because it takes much more money for people to make a living in California,” he said.
A new tax on energy content, as measured in British thermal units, or BTUs, would affect California much less than northeastern states, or regions of the country dependent on coal.
Whatever the potential for harm, California also stands to gain from Clinton’s program:
- Increased spending, on the order of $16 billion, for infrastructure could provide a much-needed boost to the state’s hard-hit construction industry. State Treasurer Kathleen Brown said Tuesday that she sent a message to Clinton that the state is “ready, willing and able” to match federal building funds.
- Because of the state’s tradition of entrepreneurship and innovation, increases in investment tax credits, reduction in capital gains taxes and other incentives could flow disproportionately to California.
- New spending on job retraining and conversion of defense industries to commercial uses could especially benefit California, which has seen the loss of about 80,000 aerospace jobs in the last two years.
Perhaps most important is the psychological effect Clinton’s program could have on long-term investment decisions.
“If people think this is going to work, and it is fair, then places like Pasadena and California will be disproportionately helped because we’re being disproportionately hurt by the current economy,” said Rick Cole, mayor of Pasadena.
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Of course, California’s recovery won’t hinge on federal programs. “It still seems that California has some fairly intractable problems in the short term that will be difficult to resolve, and most likely will be a drag on California’s recovery,” said Barry Sedlik, an economist with Southern California Edison Co. He cited workers’ compensation and regulatory reform as two key issues.
In his address to those gathered at the Biltmore, Clinton said he would ask Congress to change the tax treatment of passive real estate losses, a move intended in part to ease real estate problems here.
He added, however, that the state would have to help itself as well. “I’ll do whatever I can to support you,” he said.
Times staff writers Amy Harmon and Michael Parrish contributed to this report.
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