Take a struggling economy…a 6.8 percent unemployment rate…the threat of more government mandated benefits such as healthcare and paid sick leave…throw in a whopping dose of tax increases…and you have a classic recipe for economic disaster.
Recently, the Budget Conference Committee announced their plan to cover California's massive budget deficit, including an additional $9.7 billion in new taxes on Californians. This is potentially the worst time for our leaders to even consider such a move. Make no mistake – raising taxes will drive a number of businesses away from California, but more importantly, small businesses will be forced to choose between cutting costs (employee wages and benefits) or closing their doors. It is never the right time to scare away those who drive the economy and most jobs in California – the state needs those revenues now more than ever.
Contrary to media reports, the tax increases do not all fall on the backs of the wealthy, a favored target of a tax increase, but squarely on the backs of small businesses. The truth of the matter is that 80 percent of small businesses file under the Personal Income Tax (PIT) system, so any increase in the PIT rate will directly hit the pocketbooks of millions of California job creators. Additionally, increasing the corporate franchise tax will further add to the disincentive for larger business entities to locate or grow in California. As it stands, California ranks near the bottom in most evaluations of state business tax environments.
So how should California's budget woes be fixed? Let's start by looking at a big part of the reason we are in this mess to begin with. Like any business, it is a bad plan to spend more than you earn in revenue. Perhaps most outrageous is the common practice of funding long-term programs with short-term fixes. Our leaders have some tough decisions to make, but they must take a careful look at all the spending and reduce spending to match income.
Our leaders should be working to protect and preserve those programs and services that are already in place that will continue to help stimulate a thriving economy. A state with a thriving economy provides jobs for its residents and a chance to build a life in the community where they live. Provide the Department of Consumer Affairs with staff to provide business and professional licenses in a timely and efficient manner. Work with the Department of General Services to ensure that contracting and procurement opportunities are available for businesses of all sizes. Once time and effort is put into investing in businesses in California, additional tax revenue will come and the state can start on the road to recovery.
California should also look at increasing the number of public-private partnerships that are available in the state. Again, businesses of all sizes will benefit and projects will be done on time and under budget, creating a better bottom line for the state overall. Small businesses are especially adept at these kinds of partnerships and should be given the opportunity to participate.
Finally, once California has a budget that is balanced (and not on the backs of small businesses), there should be a discussion about a rainy day fund. Our state leaders need to ensure that the money we do have during good times isn't frittered away by creating programs that are unsustainable during tough times. Like any small business or family, California needs to create a savings plan for during good times so that there is a safety net during bad times. Control mechanisms need to be put into place to make sure California is never in this position again.
The main ingredient for a growing economy is a thriving small business economy, so let us start from the position and understanding that California's elected leaders – who, in fact, shoulder much of the blame for creating the fiscal disaster we now face — cannot tax small businesses and working Californians to get out of this hole. After all, the first rule of getting out of a hole is to stop digging.