California Business Community Should Not Enable High Cost Government

The business community is in a very tough position in California.  The California Legislature is completely controlled by the Democratic Party and its pro-labor base.

The California Republican Party and Republicans candidates are their most natural allies but Republicans are only viable in a relatively small minority of legislative races.

The result is that the California business community must build alliances with the pro-labor Democrats and foster good relationships with the Democratic leadership and their power base—the state’s public employee unions.

The rise of the so-called “moderate Democrat” is perhaps the best manifestation, which is essentially a Democrat that tends to vote pro-business on some select issues, and pro-labor on many other issues, particularly those that relate to public employee compensation.   

But the real danger here is that the California Business Community finds itself in the precarious position of actually enabling “high cost government,” characterized by higher taxes and a deteriorating business climate.

Big business will almost always oppose a tax increase that impacts them directly, but they tend to stay neutral or even support tax increases on other taxpayer classes such as small businesses and individuals.

Prop. 30 from 2012 is a perfect example.  The measure temporarily increased income taxes on individuals and businesses earning over $250,000 per year, and also included a ¼ sales tax hike with the $6-8 billion in annual revenues going to education.

The business community did not like it but they tolerated it because the state was in a difficult financial position, and the tax was supposed to be temporary.  Certain segments of the business community, particularly small business, still strongly opposed Prop. 30 (and oppose Prop. 55 as well) because their members are directly impacted and less able to shoulder the brunt of the tax increase.

Prop. 55 on the November 2016 ballot seeks to extend the Prop. 30 tax increases for another 12 years, and is projected to raise nearly double the revenue, $8-11 billion annually.

Prop. 55 on the November 2016 ballot seeks to extend the “temporary” Prop. 30 tax increases for another 12 years

Big business in California has not mobilized a campaign to defeat Prop. 55 despite the fact that it represents a “broken promise” and is essentially a permanent tax increase.

The California Chamber of Commerce and Cal-Tax have voted to oppose the measure, but have not committed significant resources because Prop. 55 primarily impacts small business and individual taxpayers.

The California Business Roundtable continues to be neutral but is scheduled to reconsider its position in mid-September.  Many local chambers of commerce have also stayed off Prop. 55 because they have a large number of representatives of the education community on their boards.

Another consideration is that the business community may not see a path to victory, short of spending in excess of $10 million or more, and they still may not win.  Prop. 55 is supposedly polling above 60%, but still likely vulnerable if a major opposition campaign is mounted given that Prop. 30 only passed with a 55% Yes vote.

I believe that it is in the California business community’s interest to strongly oppose any major tax increase because proponents of higher taxation in California will keep coming back for more, albeit with a bigger war chest and more determination.

The reality is that the cost California government is growing at an unsustainable pace due to the inability of the California Democrat Legislature, as well as most locally elected officials, to adequately control public employee benefit costs, particularly pension and health care.

For example, state and local debt is already at all-time highs despite record revenues, with total debt for public employee compensation costs estimated to be in excess of $1.3 trillion as of 2013, and likely is closer to $2 trillion in 2016.  Calpers debt has increased by more than 50% since 2014, jumping to an estimated $150 billion in 2016 due to heavy investment losses and things are not projected to get any better.

Something is very wrong here—the state has amassed record revenues, but public spending and debt is still climbing at unsustainable rates of 10-25% per year.   And next to nothing is being reinvested in California in the form of roads and improved infrastructure.

These facts may not be altogether clear to anyone who has not studied the fiscal condition of state and local governments in California, and who has intimate knowledge of the state’s public employee unions.

I would encourage the California business community to become more serious about controlling the cost of government because even if the immediate tax increase at hand (Prop. 55 and others) does not directly impact your members this time around, next time it will, particularly once the more favorable revenue options are exhausted.

Over the long-term, California’s approach to taxation has been to max out every tax revenue source available to it, and that’s why we have the highest income taxes (13.3%), the highest sales taxes (9.5%), the highest gas taxes, and the list goes on and on.

The most important fact to recognize is that there will literally be no end to the amount of tax increases, and their negative economic impacts, that the public employee unions and hospitals interest will “need” to fund public sector costs that are rising far in excess of the ability of taxpayers and the state’s economy to pay for them.

To stem this trend, a strong public case will need to be presented to voters about the accelerated decline of the business climate in California, and its consequences for the state’s future.

The only alternative to fighting an ever increasing state tax burden is to continue to raise taxes higher and higher on a shrinking economic base, something the Democrats appear to be completely at peace with, but something that is disastrous for the future of the state’s economy and its residents.

At some point in the not so distant future, the only choice the California business community will have is to flee California for greener pastures as the more than 10,000 businesses have done in recent years.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.