Weekly Report – March 23, 2015

Significant Events

Welcome to L.A.: Gateway to the USA. Last week L.A. Coalition chair Russell Goldsmith and Coalition members Ted Craver and Chris Martin joined Chance Barnett (CEO and founder of Crowdfunder) in a panel discussion – Why Los Angeles: CEO Perspectives on Investing and Operating in the L.A. Area – at L.A. Mayor Eric Garcetti’s Select L.A. conference. The event was part of a follow-up to the Mayor’s fall 2014 visit to Asia in which he invited business delegations from China, Japan, Korea, Mexico, Hong Kong and Taiwan for a two day conference to highlight how the Greater L.A. area serves as the ideal platform for companies looking to invest in the United States. The delegations went on to WDC for President Obama’s second annual Select USA Summit. The goal of the event was to welcome several hundred visiting business leaders and communicate how the business, educational and cultural resources of the Greater LA region can enable foreign investors to grow their business successfully in the U.S. and throughout the Western Hemisphere. Key points from the panel discussion:

  • CA’s economy is the most vibrant in the U.S. and it is now the seventh largest economy in the world,  which is bigger than Brazil.
  • CA is home to 33 of the world’s 500 largest companies and it accounts for 52 percent of all technology company sales in the U.S.
  • CA is home to 26 of the 122 companies in the Bloomberg Americas Clean Technology Index.
  • Sixty-three publicly traded CA companies in the S&P 500 delivered returns of 134 percent during the past four years – higher than any other large state.
  • Companies headquartered in CA have outperformed the S&P by a margin of 23 percent since 2010.
  • A. has the largest higher education system in the world, with 112 college and university campuses that produce more Ph.D and graduate degrees than any other state in America.
  • A.’s economy is remarkably diverse – there are 135 different languages spoken at home here in L.A. — and it attracts some of the world’s most creative and globally competitive industries. Los Angeles is the media and entertainment capital of the world. It is also the manufacturing center of the United States. L.A. offers world-class cultural attractions (theater, museums, the L.A. Philharmonic, etc.) that attract millions of tourists from around the world.
  • A growing number of tech and biotech companies are locating here and L.A. has more “high-tech” workers than any county in America – more than Santa Clara, Boston and New York. L.A. is America’s second largest recipient of venture capital – behind only the Silicon Valley.
  • Some 123 of the world’s 400 wealthiest people live in the United States, and 28 of them reside primarily in California.  That’s more than any other state in the nation.

Strengthen Government’s Role to Foster Economic and Jobs Growth 

CA State Tax Policy

CA Senate Bill 8 (Robert Hertzberg). In 2011 Governor Brown presided over a budget with an $18 billion deficit and now his fiscal 2015-2016 budget has a projected $2 billion cash surplus. Twenty eight percent of this surge in revenue is from exercised technology-stock options, capital gains taxed as ordinary income and Proposition 30 – the seven-year “temporary” (and retroactive) tax hike in 2012 that raised the state’s top personal income-tax rate to the nation’s highest, 13.3%. Revenues from the first two categories have jumped to two-thirds from just over half of revenue during his term in office and 1 percent of CA’s population now paid half of the state’s income taxes. When these revenues plummeted 18 percent in fiscal 2008-09, the state cut spending for education and social services, issued IOUs for accounts payable, and raised the sales tax.

CA’s $2-trillion economy has shifted from being mainly agricultural and manufacturing in the 1950s and 1960s to one based on information and services, which now accounts for 80% of all economic activities in the state.  California continues to rely less on the sales tax, which applies only to purchased goods, while leaning heavily on the richest 1%, whose incomes fluctuate like a roller-coaster. In 1950, the sales tax generated 60% of all state revenue, the income tax just 10%. Today, the sales tax brings in around 25%, the income tax more than 60%.

SB 8 is one proposed being discussed in Sacramento and it seeks to:

  • Broaden the tax base by imposing a sales tax on services, the state’s fastest growth sector, to increase revenues. Health care and education services would be exempted from the tax, as well as small businesses with under $100,000 gross sales.
  • Review the state’s corporate income tax to determine whether it is meeting its intended purposes and what impact it has on the business climate. Changes would be used to incentivize companies to implement a more reasonable minimum wage.
  • Examine the impacts of simplifying the Personal Income Tax while maintaining progressivity.

Senator Hertzberg has said that the goal is to generate $10 billion more and use it in the following ways – $3 billion for K-12 schools and community colleges, $2 billion for the two university systems, $3 billion for local governments, and $2 billion for a new earned income tax credit for poor families.

Polls show that voters do indicate they would be willing to consider tax increases if the sales tax rate were lowered simultaneously. SB 8 would extend the state portion of the tax rate up to 6.5% and local governments wouldn’t be allowed to raise their piece. S.B. will need a two-thirds legislative vote to raise taxes.

Opponents claim that this new levy will have a depressing effect on CA’s service economy based on the contention that when you tax something you get less of it. They also contend that some companies will avoid the tax by exporting the service or going underground and ensuring compliance would not be easy. CA already has a massive problem with tax avoidance due to the huge percentage of the economy that is “underground.”

Proposition 30 Extension. Governor Brown has not weighed in yet, but his surplus revenue only makes a small dent in school pension costs, which will keep increasing through 2021 and then remain at that elevated level for another 25 years to pay off $74 billion in unfunded teacher liabilities. Public union leaders and a majority of legislators are already trying to figure out how to convince voters to extend the 2012 tax increases to pay for more school funding. Political insiders believe Proposition 30 would be the easiest tax to pass since it is already levied. Especially if the sales tax piece is removed, many voters would not directly feel the tax’s pinch.

Split Roll. The split-roll property tax, taxing commercial property differently from residential property, would be a major change to Proposition 13, but it has lost steam because it would not generate enough revenues to make the effort worth while. I will provide an update if things change.

Other Resources

Below is an interesting article in the Wall Street Journal discussing what other U.S. states are doing in regards to taxes.


If you would like to learn more about CA’s tax system please go to the L.A. Coalition’s memorandum on taxes: