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Jerry Brown Defying Obama's Push For Business Tax Breaks, Putting Budget Above All Else

Paresh Dave |
January 13, 2011 | 12:44 p.m. PST

Executive Producer

Jerry Brown's proposals aren't anti-job, experts say, because state fiscal stability will foreshadow economic investment. (Creative Commons)
Jerry Brown's proposals aren't anti-job, experts say, because state fiscal stability will foreshadow economic investment. (Creative Commons)

California Governor Jerry Brown appears to have put job creation on the back burner, instead backing an effective increase of the cost of doing business in the state.

Experts and much of the state's business community say putting the budget above all else is the only way to strengthen California's entire economy. With Brown's proposals laid out, it's time for legislators to follow-through. Both the Assembly and Senate budget committee met Thursday to discuss the proposal for the first time.

“Focusing on the budget and the budget deficit in a forthright right way without any gimmicks is the most important thing for the state to do to create jobs,” said Jerry Nickelsburg, a UCLA Anderson Forecast senior economist. “And so far, they appear to be on the right track.”

Brown's budget plan says the number of jobs in California won't return to pre-recession levels until 2016. The state's lieutenant governor, Gavin Newsom, says job creation is his priority. But he has limited power to achieve that goal, and his spokesman this week couldn't offer a timetable on when his job growth plan would be released.

President Barack Obama had planned to speak Tuesday at a General Electric plant in upstate New York about “the importance of growing the economy and making America more competitive by investing in jobs, innovation and clean energy.” The event was canceled because of the whirlwind of events in the wake of the assassination attempt on Rep. Gabrielle Giffords.

The president's new business-friendly team of economic advisers seem to abide by the theory that keeping down business taxes will get the economy rolling. Obama is eventually expected to announce a revamp of the corporate tax system, hoping to drive down business tax rates by making the system more equitable. The Bush-era tax cuts extension package he signed into law in December offers a preview; it included about 50 measures saving businesses billions of dollars in taxes.

Several executives of tech companies, including GE's Jeffrey Inmelt, attested to the need for more research and development spending at the Consumer Electronics Show last week.

States of course can't partake in expansionary spending because they can't print money. California's Constitution, unlike America's, also requires a balanced budget. As a result, Brown has been forced to combine cutting expenditures on education and social services, hurting the lower and middle classes, and raising more revenues by proposing to deal blows to businesses.

“He's going to divide the baby,” said Roger Noll, a professor emeritus of economics at Stanford University. “Everyone has to feel some pain. Nobody volunteers to have pain, and they come to resent the person that inflicts it upon them.”

As former Gov. Arnold Schwarzenegger tried to close the deficit, his popularity plummeted. Those he wanted to “hurt” were not willing to swallow cuts without seeing him fall trying.

Brown has proposed eliminating redevelopment agencies that provide loans and subsidies to developers to build in “blighted” areas.

He's also proposed axing “enterprise zones”--geographic areas usually in low-income neighborhoods where business receive tax credits of up to $47,000 for hiring people from there. The savings from cutting enterprise zones would total $580 million. The enterprise zone program has been criticized by academics a couple of times and appears to be the one proposal businesses are not too worried about losing.

A third proposal kills a $1 billion corporate tax break that went into effect at the beginning of the year. Business that also operate outside of California get to choose to pay state income taxes based on either sales in California or a figure derived from California sales, real estate owned and number of employees. Forcing the businesses to pay based solely on California sales removes the possibility of cheaper payment and would leave Missouri as the only state that lets businesses choose the lesser of two taxes.

Overall, corporations would still pay lower taxes than did before the tax break was enacted two years ago.

An initiative to eliminate the tax break was defeated 58 percent to 42 percent during November's midterm election despite $9 million in campaign spending by the California Teacher's Association. Almost all of the state's newspapers penned editorials against Proposition 24, saying it was voters “meddling with the budget” and “disadvantageous” to businesses.

Noll said the question everyone raises is “How much of the pain should come from others and how much should come from me?”

Surprisingly, businesses appear divided on Brown's ideas. Some agree with Nickelsburg, saying California needs to regain a stable financial footing before business will want to invest here. That's one reason why entrepreneur Nicolas Berggruen has thrown $20 million into a star-studded think tank dedicating to finding ways by the middle of this year to make California stable for decades to come.

Other businesses—more aligned to Obama administration priorities—are not supportive because they say taking away investment incentives makes California very unattractive. If Obama goes through with more corporate tax breaks, it would hasten economic recovery.

"If the federal government can't offset the states' contractionary policies, recovery will be slow," Noll said.

One other level of government could also play a role in speeding up job growth. Even if redevelopment and enterprise zones disappear, it wouldn't preclude cities and counties from launching their own business-friendly programs. The only matter standing in most municipalities' way is help from the state—in the form of either extra payments or a lower threshold for raising some taxes. And that leads back to the state budget.

“We pay a premium for all the borrowing we do in the state and we're viewed very unfavorably,” Nickelsburg said. “Brown has to show the business community that we know how run our government in Sacramento.

“If the Legislature takes its responsibility seriously too, then it will have to make those trade-off decisions.”

 

Reach executive producer Paresh Dave here. Follow him on Twitter: @peard33.



 

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