Explaining Southern California's economy

Is Jerry Brown's tax deal a win for small business?

At Fox & Hounds Daily, John Katabeck of the National Federation of Independent Business thinks so:

California's tax policy currently rewards out-of-state corporations for selling their goods in California but keeping their manufacturing and employee bases elsewhere. These companies can play games with their taxes year after year robbing the state of critically-needed funds and denying hard-working families of good-paying jobs.

Small business desperately needs all the help it can get during these tough economic times to ensure they can keep their doors open and operate in their communities. This measure puts California on a level playing field with other states like Texas and New Jersey where similar policy was put in to place by Chris Christie and Rick Perry.

There is however a legitimate question about whether small businesses are actually going to become the engines of job creation that everyone seems to think they can be. This post from Business Insider is fairly mean-spirited, but it makes some solid financial points:

[T]he debt-to-equity ratio for U.S. small businesses soared above 100% in 2008, where it has persisted to the present. That level is significant in that it indicates that external lenders (banks) currently have a greater financial interest in the small businesses to which they've lent money than do the actual owners of the small businesses....Consequently, lending institutions are carrying over half the financial risk associated with the operation of U.S. small businesses....This is why "banks won't lend." While bankers might be skilled at running banks, like government bureaucrats, they're not qualified to run any other kind of business operation. So they don't, because doing so would guarantee the failure of the businesses to which they're carrying a majority of the financial risk. Too many of those kinds of failures and the lenders themselves would be facing the risk of going under.

Translation: small business has become too financially risky for banks to feel comfortable upping their lending levels. California's new tax policy — which has bipartisan support — should help, but it's not going to alleviate the larger problem of businesses that are carrying too much debt. This is why the financial crisis has been so damaging and has cost so many jobs: it takes a long, long time to bring those debt-to-equity ratios back to reasonable levels — levels at which banks would be eager to lend.

Photo: Ethan Miller/Getty Images

 

blog comments powered by Disqus