The Entrepreneurial View #459
California in Recession?
by Raymond J. Keating
Is California in recession?
That's an important question, not just for Californians, but for the entire nation. Why? Well, California accounts for 13.5% of the U.S. economy. One could argue that as California goes, so goes the nation.
One story that raised the recession question was a November 9 MarketWatch.com article. It quoted Jon Hatzius, chief economist for Goldman Sachs, who argued that based on the sizeable increase in the state's unemployment rate, California is on the edge of recession. Some, though, are not quite sure. The article pointed out: "Other economists who specialize in the state's economy don't think California is in a recession, but they think it's a close call."
A couple of days earlier, Reuters reported: "After several years of torrid housing starts and sales, many California homes markets are in retreat and state revenues, overly dependent on personal income taxes including capital gains taxes, so far this fiscal year are $777 million below expectation." And a bit later: "Finance Department spokesman H.D. Palmer declined to comment on specifics of budget scenarios his office is working on, but said it expects the $6.1 billion budget shortfall estimate it initially gave in summer is certainly too low because the state's economy is cooling more than expected."
Indeed, a big problem facing the Golden State is the housing market. But there's more that hampers the California economy.
California has many self-inflicted troubles that work against entrepreneurship and small business, and therefore against the state's economic well being. According to the "Small Business Survival Index 2007," which ranks the states and District of Columbia according to their respective public policy environments for entrepreneurship, California has one of the worst climates. It ranks 49th. Only New Jersey and the District rate worse.
Consider that California imposes the highest personal income and individual capital gains tax rates among the states. Corporate income and capital gains tax rates also are quite high. Such high tax rates make it far less appealing to live, work, invest and start-up and/or expand a business in California.
Making matters even worse, California piles on with other levies that many states do not impose, such as an added income tax on S-Corps, and both individual and corporate alternative minimum taxes (AMTs). The state's gas tax also ranks as the highest in the nation.
Ugly policies continue on other fronts as well. A large number of health insurance mandates, for example, drives up health insurance costs in California. That's more bad news for small business.
And as has been well documented in recent times, the state suffers from high electricity and workers' compensation costs.
These are formidable costs that weigh heavily on California's economy. News stories focused on possible recession in California highlight that government spending might have to be reined in due to slowing revenue growth. Of course, California also ranks quite poorly on the government spending measures included in the "Small Business Survival Index," so a bit of spending discipline is long overdue. But what state and local lawmakers really need to be focused on is providing broad-based tax and regulatory relief, so the state's economy can get back on track and flourish.
This has been an imperative for some time in California. Perhaps now, with the state's economy wavering, politicians will finally act.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
This article may be reprinted with appropriate citation and credit.
