Government Debt, Not Policies, Could Threaten Business Climate
In the wake of Gov. Gray Davis signing a bill creating the nation’s first comprehensive paid family-leave policy, businesspeople are fuming. They accuse him and the California Legislature of saddling them with a continuous series of mandates--regulations that add costs and hobble their ability to turn a profit. In national surveys, meanwhile, corporate executives are branding California “unfriendly” to business.
Much of the anger is superficial and irrelevant.
State government is not reflexively anti-business. Along with regulations, the state hands out plenty of benefits to industry. Overall, the Golden State remains a business powerhouse.
“We have the world’s No. 1 economy in technology, biotechnology, entertainment, foreign trade, aerospace and other industries,” notes Stephen Levy, who heads Palo Alto’s Center for the Continuing Study of the California Economy.
But California is nearly No. 1 in another category--
indebtedness--and therein lies a big problem that, over time, could have serious implications for the business climate in the state. The danger is that chronic budget deficits will prevent California from spending to upgrade the basic infrastructure that businesses must have to keep charging forward.
Needs are great. California will have to spend $56 billion in the next five years, according to a report that the Davis administration released recently, to tackle an array of troubles. Among them: clearing clogged highways to move goods and people more efficiently; building and repairing the schools that educate our work force of the future; assuring the availability and quality of water; and creating an abundance of affordable housing.
The state’s pocketbook is bare. It is borrowing huge amounts to cover expenditures this year and faces a long-term structural deficit of $5 billion to $7 billion. A structural deficit means that even a strong economic recovery won’t provide enough tax revenue to balance the state budget. Meanwhile, only New York has more debt outstanding, and California’s shaky situation is threatening to drag down its already low credit rating.
Such large budgetary difficulties are not distant abstractions but troubled realities that directly hurt businesses and workers.
In Fresno County, the employment center run by Dave Spaur provides training that aims to qualify young people in Fresno for $13-an-hour jobs. And, says Spaur, head of the county’s Economic Development Corp., “we place all the center’s graduates in jobs.” However, funding to expand the center is not possible in these deficit-ridden times, and even funding for operations is uncertain.
To be sure, businesspeople aren’t all whiners. California manufacturers face stiff competition from companies in lower-cost locales such as Atlanta, Denver, Phoenix and Dallas. And many smaller firms in particular are sure to be hurt by the new family-leave act. State overtime rules and swelling workers’ compensation costs also are real issues.
But at its best, industry recognizes the need to change--not just gripe. Brad Hart, president of Roberts Tool, a Chatsworth maker of hydraulic systems and missile parts, says his 65-employee company has adopted lean manufacturing techniques to gain efficiency and speed. As a result, he says, “we’re getting lots of orders” while “some of my old competitors are going out of business.”
Hart is no fan of Sacramento politics, but he recognizes that government is a necessary fact of life. It also is a lifeline to business in significant ways.
The state, for example, is trying to come up with a program to protect builders of multifamily housing from the threat of liability lawsuits. And Davis has just signed legislation supporting stem-cell research in the University of California system that is designed to help the state maintain its lead in biotechnology.
But in the end, the government’s ability to keep lending a helping hand is threatened by all the red ink.
California manufacturers are now seeking a 5-percentage-point reduction in sales taxes on new equipment. Yet they are unlikely to get a break in the current budget climate. In fact, if anything, business is going to be saddled with higher--not lower--taxes.
There’s no real choice. Higher taxes are necessary if this technology-rich state wants to have the services and support its world-leading industries require.
State Controller Kathleen Connell foresees higher levies being imposed on business services. Other taxes on companies big and small also are probable. In addition, Connell predicts an adjustment of the income tax to extract more from upper-income individuals.
So is California really unfriendly to business? We’ve heard that one before, says economist Tom Lieser of the UCLA Anderson Forecast, who is set to present a report on the state’s economy today.
Most of the time since World War II, California has been criticized for a poor business climate, high home prices and high taxes.
“These perturbations,” says Lieser, “have not ... had more than temporary impacts on the [state’s] long-term trend toward an increasing share of national population, real output and employment.”
Will this juncture be any different? Unless California gets its budget under control, it well could be.
James Flanigan can be reached at jim.flanigan @latimes.com.
