Has the California business community had enough?

There is a particularly nasty YouTube video that made the rounds several years ago where a school punk was bullying another student who was overweight. The punk kept punching the other kid who was forced to retreat until his back was against a wall. After several punches, the overweight kid picked up the bully and slammed him to the ground so violently that the punk literally bounces off the pavement.

For decades, taxpayers in California have been the punching bag for tax-and-spend politicians and the special interests that consume tax dollars. Periodically, however, those receiving the blows stand up and punch back.  The recall of former Governor Gray Davis in reaction to his car tax increase is a good example.

For the most part, individual taxpayers and grassroots organizations are more vocal – at least publicly – against tax hikes than the business community. Certain business interests, especially large corporations, are more likely to have a “go along to get along” attitude which means that as long as a tax increase doesn’t hit their business directly (or can be passed along to consumers), they won’t put up much of a fight.  The rationale for this is that many of these business interests are vulnerable to arbitrary government action that threatens their interests and it would be unwise to anger the politicians who could, with a stroke of a pen, put them out of business.

But the frequency and intensity of recent tax proposals out of Sacramento and from various city halls is causing pushback from even the business community. In the City of Los Angeles, the Los Angeles Unified School District jammed through a tax increase proposal that is an affront to taxpayers of all stripes. Measure EE, appearing on the ballot in a June 4th special election, would add hundreds of dollars to property tax bills and rents by imposing a tax of 16 cents per square foot of building improvements on properties within the district. That’s $160 for every 1,000 square feet. This would hit homeowners, renters and businesses with a huge new property tax increase.

To read the entire column, please click here.

Expect More Surcharges as Businesses Cope with High California Costs


Business costs“Stopped by a Pizza Hut to bring some food in last night and was met with this beauty,” an L.A. Daily News reader emailed under the subject line, “Soon to be all over California?”

Two photos were attached. One showed a bright red sign displayed prominently on the restaurant counter. Printed in bold type was this message: “Service Fee Disclosure – This location includes a service fee on all transactions. The service fee partially offsets the increased cost of operations in the State of California.”

The second photo showed a receipt with a 3.5 percent “service fee” below the subtotal and above the sales tax, and in extra-large letters, “SVC fee partially offsets the rising costs in CA.”

But it’s not “soon to be” all over California. It’s already all over California.

Ground zero seems to be San Francisco in early 2008, when a local law known as the Health Care Security Ordinance went into effect. The law requires any business in San Francisco that has 20 or more employees to set aside funds for workers’ health care.

Many restaurants decided to add an extra charge to customers’ checks instead of raising menu prices. Initially, some restaurants labeled the fee, “Healthy S.F. Surcharge.” Then in 2011 the Board of Supervisors amended the ordinance to require that any restaurant owner adding a “health” or “healthy” surcharge had to spend 100 percent of the money collected on health care. The city attorney investigated dozens of restaurants, leading to a costly settlement in 2013. The surcharges didn’t go away, but the name changed. Today they’re generally called “SF Mandates.”

This year, San Francisco’s Health Care Security Ordinance will cost employers $1.95 for each hour that each worker is paid, unless the employer has 100 or more employees, in which case the rate is $2.93.

The restaurant business is labor-intensive, and the cost of labor in California has been going up.

In 2015, the state mandated that employers give their workers three days a year of paid leave. In the Northern California town of Redding, Che Stedman, the co-owner and executive chef of Moonstone Bistro, began adding a 3 percent charge to customers’ checks to help cover the cost. “That is 24 hours of full paid leave,” he said, “so now every single employee that we have, we have to make sure that we have that money banked.”

Then in March 2016, on the Saturday before Easter, Gov. Jerry Brown cut a backroom deal with labor union leaders and state lawmakers to ratchet up the minimum wage in California to $15 an hour by 2023 for smaller employers, and by 2022 for larger ones. The Assembly Appropriations Committee passed the measure in 90 minutes and within 24 hours it was on the governor’s desk for his signature.

The California Restaurant Association was steaming like a Chinese dumpling but they couldn’t do a thing about it.

Or could they?

“Due to a myriad of legislative and court decisions, some restaurants in California have elected to add a surcharge to their receipts to defray increased costs incurred over the last several years,” begins an article on the association’s website titled, “Understanding and Guidance on Surcharges.” The tone is matter-of-fact. “The increased costs of operating a restaurant can be attributed to minimum wage increases, health care, paid sick leave, restrictive scheduling, cost of food and supplies and increased pay equity between traditionally tipped employees and heart of the house employees.”

The article offers advice on how to calculate taxes correctly and how to avoid getting sued by a city attorney, such as the one in San Diego who filed a slew of cases in 2017 charging some surcharging restaurants with false advertising and consumer fraud.

Last November, a San Diego Superior Court judge ruled in one of these cases that “the surcharge is not unlawful as a matter of law.” Similar rulings followed in similar cases.

Still, the California Restaurant Association recommends that restaurant owners minimize the risk of lawsuits by clearly disclosing the existence of a surcharge on a prominent sign or posting, large and conspicuous enough so that the sign is “likely to be read and understood by an ordinary individual under customary conditions of use and purchase.”

To avoid the problem that San Francisco restaurant owners had with the “health” surcharge, the association recommends keeping the reason for the surcharge as broad as possible, suggesting as one example, “to defray the increased cost of operations.”

“In the State of California,” added the owner of the Pizza Hut in Los Angeles, a city in which businesses also have to deal with a gross receipts tax and a trash monopoly franchise system that has sharply raised the cost of sanitation service.

Stephen Zolezzi, CEO of the Food and Beverage Association of San Diego, said in 2018 that surcharges allow the restaurant industry to send a message.

“Yes, it’s a political statement,” he said. “We’re trying to show people the consequences of legislation that adds to the cost of doing business.”

So the next time you see a “rising costs in CA” service fee on your restaurant receipt, don’t complain to the management. Go online to findyourrep.legislature.ca.gov and get the names and phone numbers of your state Assembly and Senate representatives. Chew them out for passing laws that are running up your bills.

Susan Shelley is a columnist and member of the editorial board of the Southern California News Group, and the author of the book, “How Trump Won.”

Originally published in the Los Angeles Daily News 

California Companies Look East for Affordable Housing


Leaving CaliforniaThe other day I received a call from a small business owner in California who wants to relocate his business. He named five states that he’d like me to review with two stipulations: “I’ve got to know how friendly their business climates are, and I want you to look at the cost of housing.”

The next thing he said I’ve heard time and again: “I pay my employees well but many of them can’t afford to buy homes in Los Angeles. I want to know where they can.”

Major corporations in California also are concerned about housing costs and some have publicly admitted they were a factor in their relocation decision.

I’ll share the information source that I find indispensable on the topic, an updated version that was just released, which is the 15th Annual Demographia International Housing Affordability Survey. It reviews factors in eight countries to identify reasonably priced housing for middle-income people.

Congratulations Pittsburgh & Rochester

The report finds that the ten most affordable housing markets in the million-plus population category – all of which happen to be in the United States – are Pittsburgh and Rochester, which are tied for the top spot, followed by Oklahoma City in third place; then Buffalo, Cincinnati, Cleveland and St. Louis, all tied for fourth place; Indianapolis in eighth place; Detroit in ninth place; then Columbus, Grand Rapids and Louisville tied for tenth place. (Twelve metros constitute the top ten markets because of ties).

The five major housing markets with the poorest U.S. housing affordability are in California and Hawaii. San Jose is the least affordable, followed by Los Angeles, San Francisco, Honolulu and San Diego, in that order.

Other metro areas with poor rankings include Miami, Seattle, Riverside-San Bernardino, Sacramento, Denver, New York and Portland, Ore.

Speaking of Seattle, Microsoft, is putting up $500 million to help address the housing problem by funding construction for homes that will be affordable to the company’s non-tech workers, but also for teachers, firefighters and other middle- and low-income residents. Not many companies can afford to launch that type of program.

California’s Dismal Ranking

For my California clients, I rely on the Demographia’s findings to spotlight out-of-state places where middle-income employees can afford to buy homes.

Historically, markets that are heavily regulated have exhibited median house prices that are three times or more that of median household incomes, which brings us to some particulars about the California housing market.

Unaffordability in the region ranging from Oakland through Silicon Valley and San Jose is so severe that even fully employed people can only afford to live in campers and RVs on city streets – no apartments or homes for literally several thousand people.

Demographia’s survey finds that “California is home to the most serious housing affordability crisis in the United States. Prospects for improvement appear to be bleak. Already, the new urban fringe housing, which drives housing affordability, is prohibited or severely limited by state and local [regulatory] policy . . . . California’s housing affordability is unlikely to materially improve.”

I believe it, considering that California’s new Governor, Gavin Newsom, and the super-majority of Democrats that now rule the legislature, show no inclination to soften their super-regulatory predispositions.

“Median Multiple”

The credibility of Demographia’s survey findings is high considering that it’s the most comprehensive international housing affordability survey in the world.

The survey rates middle-income housing affordability using the “Median Multiple,” which is the median house price divided by the median household income. This is the measure I rely upon when I provide reports to clients that evaluate potential locations to place a facility.

Disclosure: I know one of the survey’s authors, Wendell Cox – someone I call my “demographic genius friend.” But for those who want to know who else shares my confidence in his work, consider that his housing affordability studies have been recommended by the World Bank and the United Nations and has been used by the Joint Center for Housing Studies at Harvard University.

Also, the Median Multiple and other price-to-income multiples are used to compare housing affordability between markets by the Organization for Economic Cooperation and Development, the International Monetary Fund, The Economist, and other organizations.

The eight countries reviewed in the report are: Australia, Canada, China (Hong Kong), Ireland, New Zealand, Singapore, United Kingdom and United States.

Costly Housing Drives Companies Away

Another new report, and it happens to be mine, addresses why businesses are leaving California in record numbers. Quality of life for employees is one of the motivating factors. Those who are skeptical haven’t paid attention to the fact that many employers do care about the welfare of their employees. But you don’t have to take my word for it.

For example, constrained housing is concerning to some of California’s largest corporations. Not long ago, a Facebook executive told investors that “Bay Area housing costs need to be addressed if tech firms, such as Facebook, want to remain in Silicon Valley.”

When Toyota moved from Torrance to the Dallas/Fort Worth area, Albert Niemi Jr., dean of the Cox School of Business at Southern Methodist University, said, “It was really about affordable housing. That’s what started the conversation. They had focus groups with their employees. Their people said, ‘We’re willing to move. We just want to live the American Dream.’” Toyota found that housing costs in Los Angeles County are three times per square foot the cost of a house in Dallas-Fort Worth.

The out-of-California report reflects how smaller companies, too, have such concerns.

Guido Baechler, CEO of Singulex Corp, an immunodiagnostics company based in Alameda, said one of the motivations for relocating a hundred jobs to Round Rock, Texas was affordable housing.

Then there is Lawrence Coburn, president of DoubleDutch, a software development company. When selecting Phoenix to expand, he said, “San Francisco is a terrible place for entry-level people” and cited “failing” housing conditions as one factor. DoubleDutch expects to hire hundreds in Phoenix in upcoming years.

Not just companies but individuals are leaving California now and it appears more will do so because of housing. A poll by UC Berkeley’s Institute of Governmental Studies found that about 56 percent of individuals surveyed said that they have considered moving out of state because of rising housing costs and of those about 25 percent specified that the would likelyrelocate to another state.

Forecast: More Businesses Will Leave California

My new report about the increasing number of companies leaving California addresses why California’s housing prices will continue to rise disproportionally to the rest of the nation. For renters, the state has the most expensive metropolitan counties. Incredibly, California holds seven of the top ten most costly counties in the nation for renters.

More about housing is in the report, Why Companies Leave California, along with the who, what, when, where and why companies are departing the state at an unprecedented rate. Look for more company, exits, too as the legislators introduce hundreds of new bills, virtually none of which will lessen the state’s harsh business climate. In fact, most legislation will make it worse with higher taxes and new regulations.

Joseph Vranich provides location advisory services whose motto is “Helping Businesses Grow in Great Locations.” His company is Spectrum Location Solutions LLC, but he also has been known as the Business Relocation Coach. If you found this posting useful, please forward it to a friend and subscribe to Joe’s blog here.

This article was originally published by Fox and Hounds Daily

Business Flight From California Accelerating – New Study Confirms


leaving-californiaThe evidence is more than anecdotal. According to a recent study, business flight out of California has accelerated to an unprecedented level. In 2016, the year for which the most recent data is available, 1,800 businesses moved out or “disinvested” from California. This is the highest one-year total in the nine-year history of tracking by the study’s author.

The study was released by Spectrum Location Services, a firm specializing in advising businesses about the relative advantages or disadvantages of doing business in various locations. The firm’s principal, Joseph Vranich, is well-versed in California public policy. Not only has he tracked business flight out of the Golden State for nearly a decade, he was the co-author of the study of California’s High Speed Rail Project conducted in 2008, even before voters approved the bond measure. That study was prescient in predicting that the HSR project would meet virtually none of the promises made to voters.

The frequency of business abandonment may have started with a trickle, but it has now become a torrent. A harbinger of the trend occurred in 2005 when Buck Knives, a company founded in 1905 in San Diego, pulled up stakes and moved to Idaho. City leaders attributed the loss to California’s increasingly hostile attitude to the private sector. Since then, a litany of businesses with household names have followed suit, either by abandoning the state entirely or expanding major operations elsewhere. For example, Intel has invested billions in chip manufacturing plants in Oregon, New Mexico and Arizona. Nestle Corp. moved its headquarters from Glendale to Virginia. Others on the list include Waste Connections, Comcast, Campbell’s Soup, Tesla, Apple, Boeing and Farmers Brothers.

One of the more surprising conclusions of the report is that California’s crushing tax burden is no longer the primary motive for disinvestment.

To read the entire column, please click here.

California Taxes, Over-Regulation Force 1,800 Businesses To Relocate


Leaving CaliforniaCalifornia – notorious for high taxes and a stifling regulatory environment – reportedly saw 1,800 businesses either relocate or disinvest from the state in 2016.

Business relocation consultant Joe Vranich wrote concerning the results of a new study he authored that he is advising clients “to leave the business-hostile state because its business climate continues to worsen,” according to Investors Business Daily.

Vranich, president of Spectrum Location Solutions LLC, noted that the 1,800 “disinvestment events” that occurred in 2016 were the most since 2008.

Additionally, 13,000 companies left the state during that nine-year period.

“Departures are understandable when year after year CEOs nationwide surveyed by Chief Executive Magazine have declared California the worst state in which to do business,” Vranich said.

“The top reason to leave the state no longer is high taxes,” he said. “The legal climate has become so difficult that companies should consider locating in jurisdictions where they will be treated fairly.”

One business regulation Vranich cited was California’s new Immigrant Worker Protection Act, which fines companies for following federal immigration law.

The consultant pointed out the law creates a dilemma for business owners: face fines either from the state or from the federal government.

“Think about it. California may penalize someone in business who is a legal citizen operating a legal business that is in compliance with every federal, state and local law, who pays state and local taxes, and who creates employment – and all that counts for nothing in the state’s eyes,” Vranich said. “Signs are that California politicians’ contempt for business will persist.”

Vranich argued that it’s not just this new law, it’s the plethora of other laws and regulations California businesses must comply with and the concern of what may be coming down the line.

The American Tort Reform Foundation said California is among the nation’s worst “Judicial Hellholes” for businesses.

According to the Vranich, three previous California governors – Gray Davis, Pete Wilson and George Deukmejian – have cited earlier versions of his business climate study to raise awareness of why companies are leaving the Golden State.

The top states where businesses are relocating, ranked in order, are: Texas, Nevada, Arizona, Colorado, Oregon, Washington, North Carolina, Florida, Georgia and Virginia.

The top 10 urban areas gaining from the California exodus are Austin, Texas; Reno, Nevada; Las Vegas; Phoenix; Seattle; Dallas; Portland, Oregon; Denver; San Antonio; and Scottsdale, Arizona.

Among the businesses that have left the state in recent years are Toyota, Occidental Petroleum, Chevron, Nestle USA, Carl’s Jr., Jamba Juice and Numira Biosciences, according to Chief Executive Magazine.

There was a net outflow of approximately 143,000 Californians leaving in 2016 over people moving in from other states, based on numbers from the U.S. Census Bureau.

The only reason the state’s population is not decreasing overall is due to the 100,000-plus people per year immigrating into California from other countries and the birth rate exceeding the death rate in the state.

In addition to business regulations driving people from the state, The Sacramento Bee reported that California lawmakers are concerned about the wealthiest residents fleeing due to high taxes.

California has the highest top income tax bracket in the nation at 13.3 percent, and its treasury receives a disproportionate 44 percent of income tax revenues from the top 1 percent of wage earners.

Vranich said he is glad he took his own advice and moved his business from California to the Pittsburgh suburb of Cranberry Township.

“I moved for three reasons — taxes, regulations and quality-of-life,” he said. “First, I’ll have greater freedom in my business now that I’m free of California’s notorious regulatory environment and threats of frivolous lawsuits that hurt small businesses like mine.”

“Finally, we are enjoying a superior qualify-of-life here. We bought a house larger than what we had in California for about half the cost. We can afford to engage in more activities because the cost-of-living in Cranberry Township is 44 percent lower than in Irvine.”

This article was originally published by Western Journalism

Too Much Regulation Crushing California Business


Government regulationI was watching “A Christmas Story” with my kids recently, and it rang a little too true. You will recall that our hero, Ralphie, really, really wants a Red Ryder BB gun – and when he gets it, he nearly shoots his own eye out.

All kids have this experience to some extent. Happily, my own kids haven’t shot their own eye out (yet) but as kids grow up, they learn the lesson that not everything they want is necessarily good for them. Even as adults, we get tempted – I’d love to run with the bulls in Spain but on reflection, it’s probably not a good idea.

Our legislators really, really want to micromanage every aspect of daily life for California, and eliminate any element of risk or exposure for anyone. Like a Red Ryder BB gun, I can see the appeal. But trying to do that means shooting the eye out of California. We need risk to drive innovation; we need an element of exposure to grow.

A strong economy is how we gain stable, good-paying jobs, and it will be driven by business owners with a vision turned into reality. A little corner café, a new product or an innovative way of providing a service – the economy is grown by these women and men who put their heart into their business.

A strong economy doesn’t come from the government. It’s funny how progressives say that our current president has nothing to do with the growing economy, but then they argue that the state government has the power to create new opportunities for employees.

A strong economy can’t be legislated into existence. There’s no law that businesses have to hire, and there’s no law that businesses have to stay in California. Legislators are trying to make crappy jobs better – but they should be trying to make crappy jobs obsolete.

In a strong economy, there will be so many good jobs that employees won’t be stuck in a job at the bottom that they don’t like. Entry-level jobs are called that for a reason: people should be doing them for a couple of years and then moving on to new, better opportunities. No one should be trying to support a family on an entry-level job.

Unfortunately, in our current economy, many people are trying to survive on an entry-level job. I agree with our legislators that this is bad. But making it more expensive to hire an entry-level employee doesn’t result in lots of well-paid, stable jobs flipping burgers. It means machines flipping the burgers and college kids without any way to get their first job.

Legislators look backwards at the past to legislate the future. They’re trying to preserve what used to be middle-class jobs, and that might help employees for a couple of years. But the biggest disruptions in our lives have been the ones no one anticipated, and the government should take a step back to allow new types of jobs to flourish.

The legislature is taking steps to incentivize behaviors but we know from experience that’s not how it works. Try to make it harder to employ people part-time? Those jobs won’t turn into full-time jobs; they’ll be the last push businesses need to invest in new technology so they need fewer part-time workers.

Rather than spending energy on threading the regulatory needle, business leaders should spend their energy on growing and hiring and rejuvenating their communities.

And to do that, they need legislators to take a step back. Don’t shoot the eye out of California!

Stuart Waldman is president of the Valley Industry and Commerce Association, a business advocacy organization based in Van Nuys that represents employers in the San Fernando Valley at the local, state and federal levels of government.

This article was originally published by Fox and Hounds Daily

California ranked as least business-friendly state

As reported by the San Jose Mercury News:

If you think California is a tough place to do business, you’re not alone.

A new report from CNBC confirms what scores of companies have long suspected — California is the least business-friendly state in the nation.

CNBC’s 10th annual America’s Top States for Business study places the Golden State at the bottom of the list for 2016. California was also found to be one of the costliest places to do business, with a favorability ranking of 49 out of 50.

Those figures don’t surprise Clay Harrison, co-owner of Vidcam, a Burbank business that rents cameras, lighting and audio equipment to the TV industry. …

Click here to read the full story

Even Tax Breaks are Torture for California Businesses


tax signCalifornia has a terrible reputation of being unfriendly to business, but that’s just because some people don’t have a sense of humor.

If you love comedy, check out the website of the Governor’s Office of Business and Economic Development (GO-Biz) at www.business.ca.gov.

There you’ll find all the incentives, programs and helpful information that the state of California has created to help businesses grow and stay in California. There’s not much, but brevity is the soul of wit.

The state offers advice on “Setting up a Facility,” under the category of “Start a Business.” Here, in its entirety, is the section titled, “Acquiring Office Manufacturing Equipment”:

“Office furnishings can be rented or bought through businesses that deal primarily with office occupants. These companies are easy to locate through local telephone Yellow Pages under ‘office furniture and equipment, dealers or rental.’ Companies that sell telephone and computer systems, copy, fax and mail machines and other technical equipment can also be located through the Yellow Pages. Companies selling other office supplies such as pens, paper, tape and staples can be found through the Yellow Pages listed under ‘office supplies’ or ‘stationers,’ or through catalog sales.”

Daunted by the task of shopping for office furnishings? The state suggests a business incubator program.

It doesn’t have one, unfortunately. But “universities, cities or counties, ethnic or industry associations, or private companies” run business incubators, and “generally they offer an individual office, cubicle or at least a desk for the businessperson.”

Let’s just pray they have a copy of the Yellow Pages.

The bureaucrats at the Department of Business Friendliness don’t just sit around all day fielding inquiries on where to buy fax machines. They also administer the California Competes Tax Credit, a program that allows businesses to plead for the chance to keep a little more of the money they earned.

During the current fiscal year, these tax credits will total about $200 million statewide, which is probably less than we’re spending on the latest new watercolors of the bullet train. Those paintings should be hanging in the Louvre for what they’ve cost us.

So, how does a business qualify for the California Competes tax credit and how much money can it save on taxes?

There doesn’t seem to be a clear answer. “Tax credit agreements will be negotiated,” the website states.

The negotiating is done by the governor’s appointees at GO-Biz, then approved by the California Competes Tax Credit Committee.

The CCTC committee is made up of the state treasurer, the director of the Department of Finance, the director of GO-Biz, one person appointed by the Assembly Speaker, and one person appointed by the Senate Rules Committee.

They meet several times a year to consider applications, and the minutes of their meetings are fun reading if you’re a fan of the Inquisition.

One after another, company representatives are brought before the committee to be grilled about their application for a tax credit.

The questions are harsh. Why are your wages so low? Do you provide health benefits? What does your company do? Why do you need this money? What are you doing to get more women on the production floor? Do you have a training program? Will you hire through an employment agency? What is your outreach plan to achieve a diverse workforce?

This kind of thing caused the committee to get a visit from the legal counsel for California Competes, who explained at their meeting last November that under the law, “the sole function of the committee is to approve or reject the agreements” recommended by GO-Biz.

The lawyer said the committee has no authority to collect demographic data, like race and gender, about an applicant’s workforce. The committee also has no authority to require the applicant to collect and turn over that demographic data, and no authority to “promulgate regulations” about diverse work forces.

But that didn’t sit well with the political appointee from the Assembly, who hired an attorney independently and insisted that the intent of the legislature was to use the California Competes tax credits to pursue other “underlying goals.” The interrogations will continue, the committee member made clear, because even if there’s no legal authority for action, “Simply asking the questions sends a message.”

That’s a statement that could give all the old Russians living in the Fairfax District a nasty flashback.

And this is the business incentive program. Imagine if it was the penalty phase.

This piece was originally published by the L.A. Daily News.

Prop. 13 is California Taxpayers Only “Saving Grace”


Proposition 13 is certain to continue to be a hot topic in 2016 and beyond as “reformers” continue to work on mobilizing a statewide effort to enact a “split-roll” that raises billions of dollars in increased property taxes from California businesses.

I have worked in and around Prop. 13 in one form or another for my entire career and have collected more data and research on its impacts that anybody else I have ever come in contact with.

I have since ended that research for the “reform” side, because I came to appreciate Prop. 13 for what it truly is–the last line of defense that California taxpayers have against elected officials who refuse to control “unsustainable” and “unaffordable” spending at both the state and local levels of government. 

For those new to Prop. 13, it is a California ballot measure passed in 1978 that places a 1% limit on local property tax rates, unless a “change in ownership occurs,” and limits assessment increases to 2% per year.

At the state level, Prop. 13 requires that any measure which would raise revenues to be enacted by a 2/3 vote of the Legislature.  At the local level, Prop. 13 requires taxes raised by local governments for a designated or special purpose to be approved by 2/3 of voters and a majority for general tax increases.

Sure, Prop. 13 is not perfect, far from it.   But the reality is that there is perhaps no public policy in California that is more effective at safeguarding taxpayers against the inability of California politicians, particularly those of the Democratic stripe, from overspending and then sticking taxpayers with the bill.

With the State of California $400 billion in the red, and most local governments in the same situation, you don’t hear anyone arguing with the fact that California government has a huge spending and debt problem.

Moody’s Investor Services agrees with this assessment, having prepared a report that finds California to be the least prepared state to weather a financial storm due to its fiscal policies and inability to reform its tax system.

Without Prop. 13, California elected officials would have “carte blanc” to push the state’s $1 trillion and growing pension problem onto state and local taxpayers, serving to further exacerbate the problem.  A whole host of other state and local taxes and fees would inevitably become viable proposals overnight in the absence of Prop. 13’s protections.

The ongoing explosion in fees and tax exactions on businesses at the local level is perhaps the best indicator of what would happen if Prop. 13 did not exist—turning an already steady and increasing flow of new local taxes and fees into the equivalent of an unchecked dam-break flood of new taxes and fees on California taxpayers.

Stanford University economist Roger Noll says that the problem of ever increasing, burdensome local taxes and fees is the single most legitimate concern that California businesses express about the state’s system of state and local finance.

Opponents of Prop. 13 cite tax equity and fairness as reasons to “reform” Proposition 13 by switching away from a “change in ownership” trigger for market reassessment to a “periodic reassessment of commercial property at market value.”

Furthermore, reformers say Prop. 13 is not “fair” because it heavily taxes new investment and rewards  “long-time” landowners—resulting in heavily disparate property tax amounts.

They say that the only fair way is to bring all businesses who receive a “tax break” under Prop. 13 up to market value and then send billions of dollars in increased property tax revenues to Sacramento to spend as they please.

My primary issue with this line of reasoning is that Sacramento has already proven that it cannot manage the existing tax dollars it gets from the state’s property tax responsibly so why on earth would we send them a flood of new tax dollars?

Second, the entire state and local tax system is riddled with similar inequities so why are reformers choosing to single out Prop. 13 for “reform”?  California’s major taxes are all characterized by extremely high rates and a very limited or loophole-ridden base.

The result is that those who pay the tax pay full boat, and those who can take advantage of loopholes get a break.  The reality of the situation is that all tax “reformers” in California want to increase tax revenues by leaving the rates the same, closing the loopholes, and sending billions of dollars in increased revenues to Sacramento to poorly manage.

True tax “reform” would be to close the loopholes and lower the base to make the change revenue neutral—but there is not a single tax “reformer” in California that I know of who is pushing for revenue neutral tax reform.

This is the method that nearly all significant successful attempts at tax reform utilized including President Reagan’s 1986 tax overhaul—widely lauded as one of the most successful tax reform efforts of all-time.

Reagan’s 1986 tax reform was “revenue neutral” but hailed by politicians of all stripes for simplifying the tax code, broadening the base and reducing the rates—a win win for everyone, not just those who want more tax dollars.

Kersten Institute for Governance and Public Policy

Originally published by Fox and Hounds Daily

Current One-Party System is Bad for California


californiaTechnically speaking, California’s political system is a “two party system,” but that is largely in name only in most places in the state.

California has become a “one party state” controlled by the California Democratic Party and California Democrat politicians.
Two key drivers was the decline of the Republican Party in the wake of Pete Wilson’s Prop. 187, and the redistricting deal in the early 2000s that helped Congressional Republicans and Republican incumbents by making most of California’s districts solidly Democrat or solidly Republican, according to a conversation with the late Allan Hoffenblum, legendary GOP strategist and former publisher of the California Target Book.

Republicans are not competitive in the vast majority of districts, and once the 2016 election is over it has been reported by David Crane, Stanford University, that there will be no open Assembly seats in the state until 2024. Campaign consultants are already sulking over the lack of potential competitive elections in the years following 2016.

This lack of party competition will primarily hurt California working families and the declining middle-class and help powerful special interests. The reason is that the lack of a viable political opposition in the vast majority of districts allows politicians to pander to their “core constituencies” and ignore the vast majority of voters including independents and the political center.
The one bright spot is the passage of the “top two primary system” as the result of a back door budget deal which has enabled the rise of the “moderate democrat” in California politics which tend to be less tied to the Democratic pro-labor base and more sensible on business and independent voter issues (i.e. taxes, government regulation).

Republican challengers, and their backers, tend to be the ones who can challenge California Democrat politicians on their weakest policy stances including taxes, out of control government spending, and onerous and costly government regulation.
But in most legislative races in California the Democrat establishment candidates do not have a viable Republican challenger. The result is that many of the key issues facing California are not even debated in the campaign. This is bad for the state’s political system and its voters.

Most competitive legislative races in California are characterized as a race between a far-left “progressive, pro-labor” Democrat, and a more moderate “pro-business” Democrat. This trend is the result of the state’s relatively new “top two primary system” and is surely better than having no competition but does not provide the same benefits as a true two party system.
Most “moderate Democrats” are still pro-labor, just not as far left as the organized labor establishment–backed Democrat candidates. And most “moderate Democrats” stick to the California Democratic Party platform on most economic and social issues. They are essentially Democrats, with a pro-business slant, which is good for the state and its political debate, but does not tend to challenge the Democratic status quo on most important issues in the state.

For example, take the example of Senator Bill Dodd (D), running as a moderate Democrat in the Sacramento valley in 2016. He is selling himself as a reasonable centrist Democrat who can work with both Democrats and Republicans to get things done. But he is still “pro-labor” and tied to the Democrat labor base on most issues including environmental regulation and state spending issues–perhaps the state’s two most important current policy issues.

Perhaps most alarming, is that after 2016 many of the “moderate Democrats” may not even have the threat of a viable moderate pro-business challenger, which makes it likely that they could sway back to the left, even the far-left, staked out organized labor and California Democratic Party.

In conclusion, there are really two potential paths to bringing back electoral competition to California politics.
First, the Republican Party and its candidates could move closer to the political center to better challenge Democrat candidates. This is unlikely to happen because the state’s Republican candidates are simply a reflection of the state’s Republican voters who tend to be very conservative.

Second, the more likely scenario is that you will see an increasing split in the California Democrat Party between its “pro-labor” base and “moderate Democrats.” This split has increased dramatically in the last year, and likely to continue.
If one considers voting data, one finds that the political center is huge, larger than either party, and there is really a lot of room for new varieties of Democrat candidates to stake out a more centrist positions that appeal to independent voters who tend to be more fiscally conservative than the Democratic base yet still pro-environment. These voters tend to be more reasonable on regulatory issues and other common sense policy positions, such as keeping a lid on the state’s rising tax burden and expansion of the welfare state.

Only time will tell, but one thing is for certain, the state’s current one-party system is bad for California and the average voter, particularly independents, who in many cases do not even have the option to vote for a candidate that fits their political and policy preferences.

Kersten Institute for Governance and Public Policy

This piece was originally published by Fox and Hounds Daily