Business Update with Mark Lacter

So Cal businesses react to Governor Brown's budget proposal

KPCC business analyst Mark Lacter talks about businesses are reacting to Governor Jerry Brown's budget proposal.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, Governor Brown wants the legislature to pass a budget by March 30th - how are businesses reacting to his proposals?

Mark Lacter: So far the major business groups have been pretty positive - not so much because of anything specific (actually, there are a number of not-so-friendly business-related proposals), but because this is a budget that finally starts to get real in terms of what state government can and cannot do. Good example is the proposed elimination of California's enterprise zones. Certainly, this has been a well-meaning program - the idea is to encourage development and job creation by offering companies tax breaks if they have operations that are located in depressed areas throughout the state.

Julian: A pretty good deal, too...

Lacter: It is - for each qualified employee, a company can get a tax credit of up to $37,000 - plus they can get credit for equipment purchases. The problem with enterprise zones is that they cost the state about $400 million a year and the payback seems fairly limited. The Public Policy Institute of California compared areas with and without enterprise zones and they found that there wasn't a big difference in the number of jobs created. Now, that doesn't mean it’s a totally worthless program - just that it’s not worth $400 million. The other big savings in Brown's budget would be the elimination of redevelopment agencies, another very controversial government effort.

Julian: Remind us how that works.

Lacter: In a nutshell, these agencies purchase land in blighted areas, and then repay the borrowing costs through higher property tax revenues once the land gets developed. Thing is, a lot of the redevelopment would have taken place anyway, so what happens is that the property tax money goes to the redevelopment agency instead of being used to fund schools, health care, courts - in other words, basic services. Now, if those two programs go away - enterprise zones and redevelopment agencies - the state would save more than $2 billion a year, which is nice money given the deficit.

Julian: There's got to be something businesses don't like..

Lacter: Well, yes… There's a tax break that businesses want to keep. It was approved by lawmakers during one of those all-night sessions in Sacramento where the legislation gets added and subtracted so fast that only the lobbyists and a few of the lawmakers really know what's going on. Certainly, not the public. In this case, it was legislation that supposedly would have provided an incentive for companies to hire workers and build facilities in California without increasing their tax liabilities. Sounds reasonable, but the Legislative Analyst's Office looked into the law and discovered a clause that would give firms an even bigger incentive to create jobs out of state.

Julian: This is the tax provision that just took effect?

Lacter: Right, this month, but Brown now wants to repeal it (his budget people figure that going back to the old way could raise an extra $1 billion). They’ll need a two-thirds majority vote, which might be tough because it means having to pick up a few Republican votes.

Julian: What lessons can we learn here?

Lacter: Well, the most obvious one is that passing legislation in the middle of the night might not be the best idea. But beyond that is the general hazard of relying on tax breaks or other kinds of incentives to stimulate the economy (something we've talked about before Steve). In a few instances it might coax a business into investing in one location versus another, but by and large it's not a big motivator. The economy is going to grow - or not grow - based on factors that really have little to do with what state and local government try to do, or more specifically, with what the politicians are promising.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes business blogs at LA Observed.com and at kpcc.org.


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