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.

New Overtime Rules Burden CA Small Businesses

Money

The Department of Labor’s new overtime rules come at a jarring time for California businesses which have seen recent changes in California laws to increase both the minimum wage and mandated leave. Small business employers can’t catch a breath before a new mandate comes down affecting their employees and ultimately their bottom line.

The Department of Labor’s new rule allows workers earning $47,476 annually time-an-a-half for every hour they work beyond 40 hours. The previous annual salary threshold for requiring time-an-a-half pay was $23,660.

National Federation of Independent Business California State Executive Director Tom Scott said in a release responding to the new rule, “We see this as particularly troubling here in California where the cost of doing business is already prohibitively high. Small businesses are still grappling with the news of a $15 minimum wage; now they have to go through each salary exempt position and decide which employees they have to shift to hourly workers. This will adversely affect workplace morale as many will view this adjustment as a demotion.”

However, there is a way for employees of all stripes to get a pay increase without affecting a businesses bottom line. Unfortunately, because of the increased burdens California businesses face more businesses are looking at this benefit for their employees: Move to a state with no income tax.

If an employee receives the same wage in, say, Texas or Nevada, which have no income taxes, more money stays in the employees’ pocket. It’s like a pay raise without the companies increasing payroll.

Too many California businesses are doing the math because of the constant attack on their bottom line.

Originally published by Fox and Hounds Daily

Proposed Minimum Wage Hikes Hurt More Than Just Small Business

Minimum wage1Despite the heavy mudslinging and name-calling that never ceases to accompany an election year (this one clearly setting a new low standard), there’s one thing that Democrats, Republicans and persons of most every political persuasion are likely to agree upon: every red-blooded American deserves the right to and a fair shot at earning more money to realize their dreams.

Work hard, get paid, provide for one’s self and family – something our parents repeatedly hammered into our brains and a cornerstone of the red, white and blue capitalism that makes our country great. Every employee that has met minimum qualifications for a position deserves a reasonable “foot in the door” from day one – something that offers a temporary first plank from which to prove themselves to the employer, customers and workplace.

Now enter the Minimum Wage – a topic that is probably not foreign to you unless you’ve been hopelessly abandoned on the Red Planet a la Matt Damon. Labor unions are pushing the “Fight for $15” without first understanding the empirical data and repercussions of current minimum wage increases that have yet to fully manifest.

As with many government programs and activities that were created with the best intentions – think social security, welfare-to-work and state retirement systems – the minimum wage these days is spinning more out-of-control than The Donald in front of a microphone at an Iowa pep rally. Efforts to push, push, push for a higher minimum wage without seeing the existing ones take shape is making it impossible for small businesses and even many social programs to keep pace. And, at the end of the day, something – or more commonly, someone – will feel the negative fallout.

To put things into perspective, Californians have witnessed a 25 percent increase in the statewide minimum wage over the past two years – an increase from $8 to $9 in 2014, and another $1 increase, spiking it to $10 an hour, this past January.

Peering ahead and atop these already-dramatic increases, we’re witnessing other proposals and jurisdictions taking it even higher without knowing or seeing how the current increase in California will play out. Los Angeles and Santa Monica just hiked their local wage to $15, Long Beach to $13, Pasadena to $13.25 and Sacramento to $12.50. Add to that a legislative proposal to hike the minimum wage to $13 an hour and two measures aimed for the November ballot – one that would hike the wage to $15 over five years, and the second that would raise it to $15 over four years and add six days of mandated paid sick leave — and it leaves many asking “When is enough, enough?” as well as “Why the rush?”

Some in the Capitol and in many council chambers are heard uttering, “We can’t afford to wait – the time is now!” However, we must bear in mind that minimum wage hikes at any level that are too much, too fast, too soon will have negative consequences for many more than just small businesses in our communities.

Our policymakers need to take a careful look at other notable stakeholders that are very likely to be affected by a reckless, ill-conceived, rushed minimum wage increase policy:

In-Home Supportive Services (IHSS)/Persons with Disabilities

According to discussions with experts in the IHSS and disabilities community, a minimum wage hike will unquestionably be passed on to clients with disabilities because the resources simply aren’t there. There are over 300,000 IHSS workers in California, most of them unionized. This will be a higher cost to scores of private clients – yes, our most vulnerable patients – who are on a fixed income and they won’t be able to afford to sustain same level or duration of care. Counties, especially those in rural and disadvantaged regions, will tell you they simply won’t be able to absorb those costs. And keep in mind that many IHSS workers are family members of the clients and are likely to lose hours and in many cases health benefits because of this.

Many Californians with disabilities will be forced into institutions at a major cost to the state rather than keep them in their homes and having people care for them. To put a fine point on it, one person with special needs noted that their agency rate is about $200 a day for 24-hour in-home care, but for many it’s upwards of $350. He noted that a $5 an hour increase would be “a huge hit and for me and many disabled because that money simply isn’t there.”

Education

A representative from one Central Valley school district said a minimum wage increase of this magnitude would impact schools in two ways: (1) raising the wages of everyone who makes less than $15 currently; and (2) the compaction of the salary schedule that will create a ripple effect and force increases up the ladder and competition in the workforce. How can schools compete with others who are offering the same or more? While schools have received funding the past few years, that money isn’t appropriated in the future. By 2019, schools are expected revert to “cut-back mode.” What then? Unlike a small business, schools can’t raise prices on customers.

What are some examples of programs where reductions are likely?

  • Class size reductions
  • Hiring freezes such as grounds, maintenance, custodial staff, resulting in deterioration of facilities
  • Transportation cuts, resulting in decreased number of bus fleet runs and not enough drivers to transport students to events
  • Reduced technology dollars, resulting in network failures and computers and activities simply not there to meet the needs
  • Reduced work days
  • Reduced discretionary budgets for school sites – field trips, copy machines, etc – and other opportunities such as athletics or music.

Career Tech/Workforce Development Programs

According to a notable vocational education leader in California, these programs have already been decimated over the past thirty years, reducing the career prep they’ve been providing California students. Employers are facing untrained, undertrained workers with little or no job skills. Access to good programs is limited – with a minimum wage increase, this access will continue to decline. There will be fewer internships and work experience opportunities. The impact will be a further reduction or elimination in job readiness programs and opportunities for young workers, minority workers and low-skilled workers.

At the end of the day, school boards will face pressure on wage compression to drive wages higher. The boards can’t increase revenues so they must make cuts. The irony is that the very employees who get these raises will be among the first ones to be cut. It’s not just mom-and-pops singing the blues here.

Seniors

Seniors and retirees on fixed incomes are not likely to support any program to increase the minimum wage, as long as their own increase isn’t in the equation.

The federal government – in freezing any increase in social security – are stalling this direction, but maybe there will be a change one day.

Many seniors look for post-retirement jobs, but this would dry those up and edge seniors out of the market. And many others have made it clear that, on a fixed or limited income, they simply cannot afford a minimum wage increase in grocery stores and on the retail goods that sustain them. And remember, many of these individuals also will face higher costs with their in-home workers, making it impossible for them to keep them on their current schedules, thus lowering the quality and time of care.

We’ll all be there one day – why aren’t we thinking about this now before we all must face the grim realities of such pressures on the greying population?

Small Businesses – Our #1 Job Creators

Make no mistake – Main Street gets hit with such a hike, and when that happens, nobody wins. No matter how small and in which distressed neighborhood a small business may be, many politicians make the brash assertion that “You can foot the bill.” If someone has first-hand understanding running a California small business, they’ll tell you that’s simply not the case, especially with the thin operating margins most confront each day.

If unions truly cared about lifting the neediest out of poverty, they would fully embrace the “Total Earnings” concept, which allows employers to exempt from the minimum wage increase those employees already earning $20, $30, $40 or more, well north of the minimum wage in tips and commissions as total earnings/wages. This would actually allow employers to dedicate those scarce labor dollars to those employees who, as it was ruled this past week in the courts, are prohibited from sharing in tips – “heart of the house” employees such as prep cooks, line cooks and others. Why is labor pushing for such inequity – giving a wage increase to the highest-earning employees of a business while leaving those in the back, well,in the back and out to dry? Whose interest are they really looking out for?

The Governor was wise to recently criticize and warn against the two ballot measures that would increase the statewide minimum wage to $15 an hour, noting that they would cost the state as much as $4 billion a year by 2021 and return the state budget to annual deficits. The nonpartisan legislative analyst has noted that the first ballot measure proposal would result in “an increase to state and local government spending totaling billions of dollars per year”, with an independent fiscal analysis pegging this annual increase as high as $1.7 billion. Just last week, the American Enterprise Institute revealed the raw numbers revealed through evidence from the Bureau of Labor Statistics from the $15 minimum wage increase approved for Seattle by its City Council, with the first increase to $11 an hour taking effect on April 1, 2015. The effect of an eventual 58% increase in labor costs does not look pretty. Since that first phase of the increase went into effect:

  • Seattle’s employment has fallen by more than 11,000
  • The number of unemployed workers has risen by nearly 5,000
  • The city’s jobless rate has increased by more than 1 percentage point

Our policymakers and voters need to heed the Governor’s advice, nonpartisan state numbers, and data that’s trickling in from other cities that are now grappling with grim reality of these hikes before moving forward in any way. Let’s allow the ink to dry, dust to settle and current minimum wage policy – notably our statewide increase – to first play out so we can see what the impacts truly are. Otherwise, instead of branding it a “fair wage” we’ll all see it for what it truly is: a “fare wage”, with every one of us taxpayers – seniors, schools, disabled and many others – paying down an outrageous bill and debt for generations to come.

resident of Kabateck Strategies, and former CA Executive Director of NFIB

Originally published by Fox and Hounds Daily

Hurting Business Owners Is No Way To Help The Poor

PovertyWhen George Washington was on his deathbed, his doctors tried to save his life by bleeding him, which was considered good medicine at the time.

California businesses must feel like the father of our country did when he tried to stop the bleeding but the well-intentioned practitioners wouldn’t be stopped.

With California’s income taxes, sales taxes, energy prices and other costs at or near the highest in the nation, plus a regulatory and legal climate that escalates costs and creates high-risk uncertainties, many businesses have left the state, reduced hiring or cut hours and wages.

California’s poverty rate is 23 percent — 27 percent for children. There are now 12 million Californians enrolled in Medi-Cal, the safety-net health insurance program for low-income people.

This is a crisis, and California has to take action to address it. But we shouldn’t take actions that are inspired by the medical beliefs of George Washington’s doctors.

A proposed ballot initiative called the “Lifting Children and Families Out of Poverty Act” is exactly that kind of action. The measure would open a hole in Proposition 13 and start to draw money out of California real estate valued at more than $3 million.

The proposed mechanism is a property tax surcharge. It would begin at 0.3 percent on assessed property values over $3 million and rise to 0.8 percent on values greater than $10 million. Although it would apply to both residential and commercial property, its greatest impact would be on California businesses.

Property taxes bring in about $55 billion to the state treasury annually, and the state Legislative Analyst’s Office estimates that the surcharge would collect between $6 billion and $7 billion in its first year. But the money would not go into the general fund. None of the cash would be available to pay for Medi-Cal and none of it would be allocated toward Proposition 98’s minimum funding requirement for education.

Instead, the billions would go into a new special fund called the Lifting Children and Families Out of Poverty Fund, which would be used to fund programs and make grants to organizations that provide services.

Which programs? What organizations? Where? These decisions would be made by the California Department of Education. The measure would put the CDE in charge of reviewing plans and annual reports submitted by communities that apply to become “California Promise Zones” eligible to receive money from the fund.

The ballot measure would increase funding for cash grants to the poor and for subsidized tax-refund checks to low-income workers. It would spend billions on subsidized child care, loans for child care providers, grants for students studying to be child care providers, and loan forgiveness for child development professionals. It would also pay for preschool in designated areas, and for home nursing visits to check on families with young children.

About 10 percent of the money raised would be spent on job training, including tax credits for businesses that participate in the training programs.

But education, training and child care, while important, are not going to lift people out of poverty unless they can find good jobs.

A true anti-poverty agenda would be focused on improving the conditions for business expansion and job creation throughout California. It would include tax cuts, an end to lawsuit abuse, and an effort to prune unnecessary regulations, as well as funding for education, job training and child care.

We’ll never cure poverty by bleeding job creators. That’s the medically proven path to the tomb.

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DWP Demands Could Uproot Two Plant Nurseries

PlantWhy is the Los Angeles Department of Water and Power forcing two San Fernando Valley nurseries out of business?

Green House Nurseries in Arleta and Live Art Plantscapes in Northridge are small, owner-operated businesses. They have employees. They pay taxes. They comply with all applicable regulations. And like many nurseries in Southern California, they’re located on utility-owned land that is directly underneath power transmission lines.

These wholesale nurseries supply indoor plants to hotels, retail stores, office buildings and commercial designers. Some of the lush, tropical plants that decorate the Wynn and Encore hotels in Las Vegas were grown in Arleta. Some of the spectacular red bromeliads that will be in the Bellagio’s Chinese New Year display are growing right now in Northridge.

Green House Nurseries was a new business venture when owners Mark Whitten and Paul Needleman began renting land from LADWP in 1998. Whitten, a geologist, and Needleman, a horticulturist, built two climate-controlled greenhouse structures with the full approval of LADWP. In 2003, they received approval to build a third greenhouse on the property. Small-business loans helped to cover the cost of construction, which ran into the hundreds of thousands of dollars.

“These are engineered structures that will withstand 100-mph winds and earthquakes,” Whitten said, pointing to a thick steel support post sunk deep into the ground. “They were built to LADWP’s specifications.”

But about a year ago, LADWP’s real estate department sent Needleman and Whitten a letter stating that the 15-foot-high greenhouses would have to be dismantled and replaced with smaller structures no taller than 10 feet.

That would put Green House Nurseries out of business. The heating and cooling equipment in their greenhouses can’t be cut up and segmented into smaller modules.

Live Art Plantscapes received a similar letter and faces the same grim situation. Owner Larry Tabeling has built a business that depends on the climate-controlled greenhouses approved by LADWP 11 years ago.

Too bad, says LADWP.

But why?

They won’t say.

There’s no question that the city-owned utility has the legal right to control the use of the land under its transmission lines and to withdraw permission for any structures or activities. But neighbors are concerned about the kind of structures and activities that could return to the sites if the nurseries are kicked out.

The Arleta Neighborhood Council pleaded with City Councilwoman Nury Martinez in September to help keep Green House Nurseries under the power lines. “We do not want to see them go,” wrote council president John Hernandez. “We fear that if they do go, the property will revert to an empty lot attracting illegal dumping, drug traffic, homeless, etc.”

Like Live Art Plantscapes, Green House Nurseries is located in a residential neighborhood, surrounded by quiet streets of single-family homes. “They are the perfect neighbor,” Hernandez wrote, “This is the kind of business that any city would be happy to have, and we do not want to lose them.”

Loyce Lacson, who heads an Arleta neighborhood watch group, wrote to Martinez asking for her help to get Green House Nurseries “grandfathered” for another five-year extension of their license. “Previous to Green House locating to Arleta, DWP was not maintaining the property,” Lacson wrote. And crime was a problem. A cluster of candles and flowers still marks the site of a shooting before the nursery moved in.

The Arleta Neighborhood Council made inquiries to see if other utilities were implementing new height limits for greenhouses. They were not. “We found that nurseries under power lines in other parts of Los Angeles and Orange Counties with similar structures have not been asked to make any modifications to their structures,” John Hernandez wrote in his letter to Martinez.

Given the cost of land, these businesses are unlikely to reopen in Los Angeles if forced out of their current locations. The city will lose the tax revenue, the employees will lose their jobs, and the communities will lose a good neighbor.

But why? If the greenhouses met all applicable LADWP and building code requirements at the time they were approved, what has changed?

Before two small businesses in the San Fernando Valley are destroyed, someone at LADWP should answer that question.

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SB406: Job Killer Threatens Us With More Litigation and Costs for Small Business

JobsA workplace is most successful when an employer will want to do what it takes to keep a worker happy and productive. This includes accommodating his or her “work-life balance,” within the constraints of operating the business.

But as usual, California has gone a different direction.

Workers here enjoy the most generous mandatory leave policies of anywhere in the nation.  The leave programs currently available include:

  • Family Medical and Parental Leave, applicable to employers of more than 50 workers, provides up to 12-weeks protected leave for employee’s or immediate family member’s medical condition or to bond with a newborn.
  • Pregnancy Disability Leave, applicable to employers of more than five workers, provides up to 16 weeks protected leave (in addition to the 12 weeks, above).
  • School Activities Leave, applicable to employers of more than 25 workers, provides up to 40 hours annually to attend school-related activities of a child.
  • Kin Care, applicable to all employers, allows employees to use up to half of paid time off for family members’ illnesses.
  • Paid Sick Leave, applicable to all employers, provides at least three sick days a year for even part-time employees and includes illnesses to their family members.

Only seven states, including California, have their own separate family leave laws. Only three states, including California, have a paid sick leave mandate. Only nine states, including California, have protected school/parental leave.

California is the only state with all of these protected or mandatory leave laws.

Indeed, California has mandated their notion of what constitutes appropriate employer behavior at every turn.

Or … almost every turn.

For wherever there’s a blank spot on the missing-mandate map, the California Legislature is there to fill it.

Last year, the Legislature mandated paid sick leave on every business in the state. This year the Legislature is considering a bill to apply the protected family and medical leave mandate to small businesses with just 25 workers, and expand the definition of family to include grandkids and grandparents, siblings and in-laws.

The upshot would be to require employers, including pretty small businesses, to provide up to 12 weeks of leave and, in some cases for larger businesses, up to 24 weeks (because the extended application of the leave is inconsistent with federal law). An employer must agree to the leave no matter the circumstances of the business. Even if other employees are also on extended leave, a worker’s request cannot be turned down.

These leave programs, like other employee benefits, can have salutary effects on the worker and the workplace. Permitting an employee to stabilize his or her family’s health can be vital for peace of mind and workplace productivity. However providing a mandatory entitlement to such extensive leave places too much burden on employers, a likely reason most other states have drawn the line at 12 weeks for larger employers.

And if a costly mandate on employers isn’t enough, the proposal provides another opportunity for trial lawyers to hold up complying businesses for damages and attorneys fees.

resident of the California Foundation for Commerce and Education

Originally published by Fox and Hounds Daily

Trial Lawyers Abuse Prop. 65 — At The Expense Of Small Business

Prop. 65 warningThe Center for Accountability in Science released a new video interviewing small businesses about the effects of California’s chemical warning law, known as Proposition 65, on their operations. Rather than making Californians safer, Proposition 65 has become a tool for trial lawyers and their clients to extract large financial settlements from businesses.

The new video highlights the experiences of three small businesses — a golf club cover manufacturer, instrument case manufacturer, and nutritional supplement manufacturer — served lawsuits under Proposition 65, and explains that while their products pose no reasonable risk of harm to consumers, these businesses were still forced to pay thousands in settlement costs for failing to adequately warn consumers.

Certainly, we should tell consumers whether they’re being exposed to toxic substances, but the threshold for warning under Proposition 65 is so low it’s utterly ridiculous. Consumers have no way of looking at a product with a Proposition 65 warning label and understanding their actual risk of harm. So instead of helping consumers make informed decisions impacting their health, the law has morphed into a way for trial lawyers to earn millions from business owners who fail to warn consumers of essentially nonexistent health risks.”

Newly-released figures from the California Attorney General’s office reveal businesses paid over $29 million to settle Proposition 65 lawsuits last year — a 68 percent increase from 2013. Seventy one percent of that total went to trial lawyers. Since 2000, businesses have paid more than $228 million to settle Proposition 65 lawsuits, and $150 million of that total went to plaintiffs’ attorney’s fees and costs.

As explained in the video, the cost of defending against a Proposition 65 lawsuit in court—even when a business is innocent—is so high that many small and mid-sized businesses are pressured to settle out-of-court. To ward off future lawsuits, some businesses have started putting labels on all of their products, regardless of whether they actually contain a chemical listed under Proposition 65.

It’s absurd to think consumers are actually at risk of harm from the golf club cover sitting in their garage most of the year or the case used to carry a guitar. These bounty hunter shakedowns highlight the need for California’s legislators to tackle real reform to Proposition 65. The state simply can’t continue allowing lawyers to piggyback off business owners under the guise of protecting Californians.

You can view my paper calling for reforms to Proposition 65 here.

Chief Science Officer for the Center for Accountability in Science

Originally published by Fox and Hounds Daily

AB588 Could Save California Businesses Millions

California needs to make major progress when it comes to preventing abusive lawsuits. The state earned the title of “Judicial Hellhole” again this year, calling attention to the fact that California’s legal climate is out of balance, and things are getting worse each year.

California earned this title because of laws like the Private Attorney General Act of 2004 (PAGA), which allows employees to bring lawsuits directly against their employer for a variety of California Labor Code violations – no matter how trivial. No harm or damages must be shown in order for an employee to sue under PAGA, enabling trial lawyers to file expensive and abusive lawsuits against employers seeking quick settlements over trivial mistakes, such as typos on documents. These abusive lawsuits make California an even more difficult place to own and operate a business.

The current law allows trial lawyers to file multimillion dollar lawsuits over trivial paycheck violations, such as not listing the complete employer’s name and address on pay stubs properly. These minor mistakes have statutory penalties that can go back four years at a cost of $100/$200 per paycheck violation.

A handful of lawyers are currently making a killing finding minor mistakes on an employee’s paycheck stub to file multimillion dollar lawsuits. These lawsuits are not protecting the citizens of California as the law intended. Instead, the law benefits greedy personal injury lawyers who are jeopardizing California’s economy.

For instance, a recent story on KGET-TV in Bakersfield highlighted the case of B and L Casing, a local company that was hit with one of these lawsuits and settled for $1.5 million. The company is now planning to move out of California – taking jobs with it.

Thankfully, California has an opportunity to reverse some of the damage done by PAGA. AB 588 by Assemblywoman Shannon Grove would give businesses a chance to correct a paycheck error within 33 days before getting hit with a lawsuit. Currently, the law does not give businesses a chance to fix insignificant mistakes on their paychecks before getting hit with such penalties.

AB 588 is a reasonable and fair approach that would help stop shakedown PAGA lawsuits against California businesses while still encouraging them to fix issues of minor noncompliance with the California labor board. AB 588 will be heard in the Assembly Labor and Employment Committee on April 22nd.

Tom Scott is executive director, California Citizens Against Lawsuit Abuse

Originally published by Fox and Hounds Daily

California Business Needs to Go Small or Go Home

NO ESCAPE FROM THE TAX VICE-Here’s the bitter reality for business in much of California: there’s no cavalry riding to rescue you from the state’s regulatory and tax vise. The voters in California have spoken, and with a definitive, distinctive twist, turned against any suggestion of reform and confirmed the continued domination of the state by public employee unions, environmental activists and their crony capitalist allies.

You are on your own, Southern California businesses, and can count on very little help, and, likely, much mischief, from Sacramento and various lower orders of government. To find a way out of stubbornly high unemployment and anemic income growth, the Southland will need to find a novel way to restart its economic engine based almost entirely on its grass-roots business, its creative savvy and entrepreneurial culture.

This shift poses a great challenge, both for California’s interior counties and parts of the coastal region. Unlike Silicon Valley and its hip twin, San Francisco, no one is investing much in the Southland. Among the nation’s largest metropolitan areas, the Los Angeles region has become a corporate stepchild, trailing in new office construction not only to world-beaters like Houston, but also New York, the Bay Area and even slower-growing Philadelphia or Chicago. In fact, although the second largest metro area in the country, LA-Orange County does not even make the top 10 regions for new building.

Nor can we expect much in the way of residential housing growth, particularly single-family homes, as the state’s planners continue their jihad against anything smacking of suburban expansion.

Traditional industries like aerospace, manufacturing and logistics face enormous regulatory barriers, ruinous taxation levels and huge energy price increases that will slow any potential growth, and could lead to yet more departures by existing large firms. Virtually all the region’s former major established aerospace companies have relocated their headquarters elsewhere, which hurts efforts to get them to expand or maintain facilities here.

Despite all this, the Southland is not without considerable assets. Perhaps most promising is the region’s status as the nation’s No. 1 producer of engineers – almost 3,000 annually. This raw material is now being somewhat squandered, with as many as 70 percent of graduates leaving the area to find work.

But there’s no reason for unmitigated despair; overall, Los Angeles-Orange has increased its ranks of new educated workers ages 25-34 since 2011 as much as ballyhooed New York, San Francisco and much more than Portland, Ore. For its part, the Inland Empire ranked fourth among 52 large metropolitan areas in terms of increased presence of bachelor’s degree-holders in this age group, adding almost 19,000 college-educated people since 2011.

There’s also a case to be made for Southern California as an emerging tech hub. As venture capitalist Mark Shuster points out, the region ranks third, just behind the Bay Area and New York, for its percentage of the nation’s tech startups, and is now the fastest-growing. The overall tech base, which includes aerospace, is still the largest in the country, with more than 360,000 employees. As tech moves from basic infrastructure to application, Shuster argues, the Southland’s time may come.

Despite producing MySpace, the region may have lost out in the social media wars, but shifts in tech trends could turn out to be far more advantageous. This relative optimism is remarkable given the losses in so many key engineering-driven industries over recent decades, from electronics and energy to aerospace.

Southern California’s technology community could well benefit from such things as growing demand for content among tech firms, as well as attempts to reboot space exploration. Indeed, investor Peter Thiel recently suggested that the region’s technology industry is the most “underestimated” in the nation.

“I’d definitely be short New York and long LA,” Thiel told the Los Angeles Times, citing both commercial space pioneer SpaceX and Oculus, the Irvine-based maker of virtual-reality headsets.

The case for a grass-roots rebound of tech in Southern California depends heavily on one key asset – the presence of the nation’s largest community of people in the arts. Roughly half of these workers are self-employed, according to the economic forecasting firm EMSI.

The Silicon Valley may be ideal as a place to nurture digitial technologies, but “nerds” as a whole are not cultural mavens or trend-seekers. They are better at transmitting messages than putting something worthwhile in them. In contrast, Southern California excels in filling messages with product.

The large existing base of television, movie and commercial producers has nurtured skills that are sought worldwide. Yet at the same time, with the studio system clearly in decline, as large productions go elsewhere, digital players such as Netflix, Amazon, Apple, as well as Los Angeles-based Hulu, have become more important. Indeed, when my Chapman students, many of them film majors, discuss their futures, it is increasingly these intermediaries, not the studios, that they identify as critical to a successful career.

This suggests a very different picture of the Southland’s industry than the one normally associated with large companies, studios and deep concentrations of talent. In the future, more production will be done by individuals, sometimes working out of their homes, scattered across the region. According to Kauffman Foundation research, the LA area already has the second-most entrepreneurs per 100 people in the U.S., just slightly behind the Bay Area. By necessity, Southern California’s economy will become more entrepreneurial and grass-roots; even as we have been losing large companies, our percentage growth in self-employed is among the highest in the country.

Not surprisingly, this activity appears concentrated not in the traditional bailiwicks in the San Fernando Valley, or in the hyped Downtown-adjacent areas, but along the coastal strip from Santa Monica to Irvine that some promoters have christened “the tech coast.” This epitomizes the growing role of young individuals and startups – as opposed to veteran engineers – in shaping the Southland’s emerging tech economy.

This pattern, however, is not just restrictive to digital entertainment. Southern California’s network of tested aerospace engineers – which, at 5,000 people, is second only to Seattle’s – is one reason why companies like SpaceX have located here. In an economy that relies more and more on individual expertise, this is a critical advantage.

One powerful caveat: We are not likely to see much blue-collar spinoffs of tech here, due largely to high land, regulatory and energy costs. Space X, for example, may have its key brain power in Southern California, but has chosen to construct its spaceport in lower-cost, business-friendly Texas. Another aerospace firm, Firefly Systems, this year decamped entirely for Texas, moving its headquarters to the Austin area and rocket engine facilities to rural Burnett County.

This pattern suggests that many of our emerging firms may remain somewhat limited in scope and largely focused on high-end functions, which reduces the positive impact for the region’s struggling local middle class and working class.

But the new grass-roots economy does not apply only to tech. Los Angeles has seen a huge rise in the number of people working from home, a percentage that since 1980 has more than tripled even as transit’s ridership share has dropped. Small, home-based businesses are common not only in such fields as real estate, but also in business consulting and even trade.

These home-based businesses, and small ones tucked into strip malls or small industrial centers – for example, in food processing – represent the last, best hope for a revived Southland economy. Our corporate community seems destined to continue shrinking, but this does not necessarily mean that the overall economy has to follow suit. Unable to rely on local officials to make things better, our best chance lies with relying on the entrepreneurial spirit and creativity of our people – the very thing that made us such an economic beacon in decades past.

This article was originally puslibhed on City Watch L.A.

(Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study,The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA. This piece was posted most recently at newgeography.com.)

California: The Land of Double Taxation for Small Businesses

Just think: You run a business. Your partner embezzles from you and you are reeling – you feel like you’ve been punched in the gut. Next, California’s state government shows up and slaps you around. When you object, Sacramento offers no apology, no comfort. You’re on your own.

Farfetched? Read on to see what happened to a California Limited Liability Company (LLC) that tried to play by the rules.

First, an LLC is a form of business that permits the owner to avoid double taxation. In California, such companies must pay an annual minimum franchise tax of $800, which is the highest of any state (in 40 other states the fee is $100 or less) and may be subject to additional fees based on revenue.

An article by Mike Dazé in Bloomberg BNA – Corporate Close-Up: The Burden of California’s Taxes and Fees on Limited Liability Companies – points out that the State Board of Equalization “illustrates the challenges businesses face when trying to reduce their liability for taxes and fees in California. A company filing two-short period returns in tax year 2010 unsuccessfully protested the imposition of the minimum tax and LLC fee in each short period.”

In short, they objected to double taxation.

The company, Bay Area Gun Vault, LLC, converted from a two-member entity into a single-member LLC after one of the two members was caught embezzling money and was removed. So the company filed two short-period returns for 2010, one as a two-member LLC and the second as a single-member LLC.

In the first return, the company timely paid the annual tax of $800 and an extra LLC fee on profit. In the return for the second period, the company did not pay the LLC annual fee, but did pay the tax.

Despite two tax returns, the company clarified that the income was for the same business with the same tax ID number and assets and was operating in the same location. So the company should owe only $800 in tax and an LLC fee of $6,000.

But the removal of the embezzler caused a “technical termination” of the original LLC because 50 percent or more of the interests changed hands. Hence, the resulting single-member LLC was a “new entity for tax purposes” and owed the minimum tax and LLC fee during the same year.

Mr. Dazé wrote, “The logic of the company’s argument is appealing: LLC taxes and fees should not be imposed twice in the same year on the same business.”

The Board claims there is no statutory support for that position.

Well, if the Board is correct, why did legislators let an unfair law stand? Do Sacramento lawmakers use no foresight in determining whether technical provisions in business-oriented laws might cause future injury?

Actually, I know the answer to my own questions. Here is why the legislature doesn’t care how its actions harm the business community:

  • First, the Franchise Tax Board (California’s version of the Internal Revenue Service) has projected revenue from LLC taxes and fees to be $753 million in fiscal year 2014-2015. Sacramento wants to collect every single penny of that revenue.
  • Next, California’s legislature is packed with people who will use taxpayer funds to support the latest half-baked ideas. But they routinely turn a deaf ear to requests from the business community for fair taxation and regulatory policies.
  • Finally, most Sacramento politicians are clueless about what it takes to run a business.

To amplify on that last point – only “18 percent of the Democrats who control both houses of California’s full-time legislature worked in business, farming or medicine before being elected,” wrote former California Assemblyman Chuck DeVore. “The remainder drew paychecks from government, worked as community organizers, or were attorneys.”

In business-friendly Texas, “Democrats are more than twice as likely as their California counterparts to claim private-sector experience outside the field of law,” continued DeVore, and “75 percent of the Republicans earn a living in business, farming, or medicine….” All of that can be found in his book, The Texas Model: Prosperity in the Lone Star State and Lessons for America.

The analysis was for a couple of years ago, but the makeup of both legislatures remains virtually the same.

California is replete with demands for “environmental justice,” “social justice,” “income justice,” “sexual justice,” “workplace justice” – oh, the list goes on and on. What California needs more of is “entrepreneurial Justice,” “business justice” and “tax justice.”

Gov. Jerry Brown and legislative leaders should reverse tax-confiscatory policies and refund overpayments to that LLC and others in similar positons. If not, California will perpetuate its mean-spiritedness towards corporations – even the one-person kind.

The Irvine-based Principal of Spectrum Location Solutions helps companies plan and select ideal sites for new facilities across the U.S. and internationally.

This article was originally published at Fox and Hounds Daily