Killing The Golden Goose

California’s dislike of business, and willingness to tax it into oblivion, is storied. As State Senator Ted Gaines (R-Roseville) is quoted saying in Crazifornia:

I am tired of my constituents and other business owners here being treated like pinatas by regulators and politicians who smack them around until some fine or penalty falls out.

Or some newly created tax liability – like the new retroactive (to 2008) tax that’s going to smack the Golden State’s golden goose upside the head. Henry Blodget explains in Business Insider:

As a way of encouraging entrepreneurs and investors to start companies in California, the state has long offered a tax deduction for those who start, invest in, and eventually sell companies.

This tax deduction allowed entrepreneurs and angels to exclude 50% of any gain on the sale of “Qualified Small Business” (QSB) stock.

California’s capital gains taxes are a high 9%, so the deduction reduced the capital gains rate to 4.5%. This encouraged the entrepreneurs to start and keep their companies in California, instead of decamping to lower-tax states.

And, for many years, California entrepreneurs and investors have taken advantage of the deduction.

But now the state has apparently decided that it no longer needs to encourage entrepreneurs to start and keep their companies in California.

So it is eliminating the tax deduction.

Far more startling, the state is eliminating the deduction retroactively–going all the back to 2008. (Emphasis in original)

As you can imagine, those QSBs, the companies that qualified for the reduction in taxes but now suddenly don’t qualify, are not reacting positively to this news.

Retroactive tax increases – a recent passion of our revenue-hungry governor and his Democrat allies in the legislature – should be unconstitutional. They’re certainly unconscionable. Business people make decisions based in part on tax implications, and to change those implications after the fact is akin to double jeopardy and an apparent  violation of habeas corpus. An affected party would have to go back in time to protest the change, which of course had not yet been changed.

It’s taxation without representation stuck in a time loop.

The impacts of this criminal behavior by the state will be swift and profound. For starters, a lot of entrepreneurs who sold their businesses after 2008 are going to be very, very angry at the state, and will become much more likely to leave the state. Worse, hundreds or thousands of other entrepreneurs who plan to sell their companies will relocate to states with less insane tax policies.

Like Prop 30, the net effect will be not more money for the state, but less. Will Sacramento ever learn that bullying the successful has consequences?

Sidebar: Crybabies at Work

In an article in X-Economy, California entrepreneur Brian Overstreet explains how this crazy situation came to be.

It seems that a few years ago, the Franchise Tax Board (FTB, the state tax collector) told a company that had taken the tax advantages due it as a Qualified Small Business to drop the “Q” and pay the higher nine percent capital gains tax. The FTB had determined that the company failed to meet one of the qualification points – having 80 percent of its workforce and assets in California.

The company sued and won, with the court ruling that the FTB’s action was an unconstitutional violation of the Commerce Clause.  Overstreet picks up the story from there:

Since the FTB lost the case, you might think that they would strike the unconstitutional requirement and keep the rest of QSB statute intact. Not a chance.

What the FTB did instead was to take their ball and go home. They decided that since they could not impose the “80 percent requirement,” no one would be entitled to the QSB exclusion. They put out an announcement terminating the Qualified Small Business exclusion and retroactively disqualifying all exclusions and deferrals going all the way back to 2008.

True to form, California is alone in its stupidity.  The federal government, tone deaf as it is on the economy, realized that encouraging fast-growing businesses is a good thing and extended its QSB program.

Overstreet – and Crazifornia – conclude:

Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?

The Fifth Day of the Twelve Days of Crazifornia

“On the fifth day of Crazifornia,
Gov. Moonbeam gave to me five fleeing comp’nies,
Four bankrupt cities,
Three falling bridges,
Two super-majorities
And a tax hike on millionaires.”

California may do a great job of attracting welfare recipients through more generous benefits, or featherbedding the pensions of state employees, but it has been recognized as the bottom-dweller of business friendliness every year since at least 2009. That’s when the readers of Chief Executive magazine first decided running a business in California was even crazier than trying it in New York, Illinois, New Jersey or Michigan. “Sacramento seems to take perverse delight in job-killing legislation,” the magazine wrote.

California state senator Ted Gaines, R-Roseville, was more colorful in his description of the state’s approach to business, writing in a Sacramento Bee op-ed:  “I am tired of my constituents and other business owners here being treated like piñatas by regulators and politicians who smack them around until some fine or penalty falls out.”

Whether you call it a perverse delight or piñata-smacking, the result is the same: Legislators, regulators, lawyers and environmentalist have driven up the cost of doing business in the Golden State until it has become 30 percent greater than in the neighboring states.  Those states are actively wooing California businesses – and the impact is showing.

Through Ronald Reagan’s governorship, California attracted millions of people from all over the country for the simple reason that they could make more money in the Golden State than anywhere else in the Union.  Now it’s a business black hole. Jerry Brown started it in 1975 with his anti-growth policies that stopped infrastructure construction and started many of the state’s environmental regulations.   He was so successful that by the end of his governorship, just eight years after Reagan left office, the state had become the fourth least business-friendly in the nation.

The result of 40 years of anti-business policy is evident in a major reversal for California:  It now has a declining standard of living. California’s median household income plummeted by 9 percent – nearly twice the national average – between 2006 and 2010, according to the U.S. Census Bureau.  By late 2011, not even half the state’s population made enough money to be categorized as middle class, the direct result of California losing 26 percent of its manufacturing jobs and 35 percent of its high-tech manufacturing jobs between 1990 and the start of the recession in 2008.

When mid- and post-recession numbers start being reported, expect the state’s standard of living to drop even more, since it lost 1.2 million jobs between 2008 and 2010.  In the same period, Texas added 165,000 jobs.

This state, that over time has tempted millions to leave their dusty towns and rusty cities for the California promise; that once inspired an entire nation with its gutsy embrace of the future; that birthed Hollywood, aerospace, Apple and eBay and their seemingly countless high-paying jobs, is now the state that leads the nation in gloominess.  In 2010, at least 204 companies said goodbye to the state, exactly four times more than fled in all of 2009, according to business relocation expert Joe Vranich.

The exodus surged to more than 280 companies in 2011, when they left the state at a clip of 5.4 companies per week.  And that’s only the companies that let people know they’re pulling out.  Vranich says that, for every one departing company he tracks, five companies probably leave surreptitiously. By that calculation, as many as many as 1,400 companies could have left the state in 2011, leaving more joblessness and economic gloominess in their wake.  And for every company that actually packs up and leaves, dozens more move assembly lines, processing centers and entire divisions elsewhere, while executives stay behind to enjoy one thing California does excel in – a pleasant climate.

Excerpted from Chapter Six of Crazifornia: Business: Roll Up the Red Carpet and Call the Moving Van.


Brown Wants New Anti-Business Super-Agency

Governor Brown’s proposed 2012-2013 budget – rushed out yesterday after a staffer inadvertently published it – includes what we’d expect from a liberal democrat governor … and more.

Sure, it’s got more spending (7 to 9 percent more, depending on who’s crunching) and class warfare (higher taxes on the “wealthy,” defined as $250,000 and up).  But its real surprise is buried deep down:  a new super-agency charged with making life even more miserable for California businesses … if such a thing can be fathomed.

The Daily Caller picked up my column on the budget and the new super-agency this a.m.  It’s worth reading the whole thing – and I hope you do, because they count clicks! – but here’s the relevant material on the new super-agency:

Brown is calling for the creation of the Business and Consumer Services Agency, a new mega-agency that apparently will “service” businesses in the way male farm animals “service” female ones. The agency will combine habitually anti-business departments handling consumer affairs, “fair” employment and various business licensing and inspection functions, and into this fetid anti-business environment drop “the newly restructured Department of Business Oversight.”

Restructured from what? The department doesn’t currently exist, so it appears that Brown is creating an entirely new arm of government, surrounding it with anti-business zealots and charging it with increasing the amount of oversight of California businesses that are already suffering from too much oversight.

What lunacy is this? The five and a half companies a week that are leaving California are sending the clearest possible signal that California is death to business, but Brown still proposes to make things worse.  Meanwhile, his budget barely tweaks public employee pensions and keeps the California High Speed Boondoggle Rail Commission alive and spending.

Oh … I’d better explain that picture of Brer Fox and Brer Rabbit.  It’s about this, the column’s conclusion:

In reality, though, the governor’s proposed budget means virtually nothing. Even as Brown was announcing it, a judge ruled unconstitutional the health care cuts the governor had proposed in his budget last year. Then the Democratic Senate leader lined up against it, pledging to fight proposed cuts to social services. And of course, the state employee unions and their armies of lawyers and lobbyists are busy today planning their campaigns to force Brown into more spending and more taxes — which is sort of like forcing Brer Rabbit into the briar patch, where he’s right at home.

Barking Towards Oblivion

Yesterday, the California Democrats unveiled their budget proposal, an utterly uninspiring amalgamation of new burdens on businesses and taxpayers, with no proposals to cut spending – not one.

Businesses would be scammed out of $2 billion by letting some rare California business tax breaks expire. Personal income tax and car fees (what got Grey Davis drummed out of office, for cryin’ out loud!) would both go up. There would be no cuts to welfare entitlements, no sanity injected into the state’s prison system, and certainly no purging of useless, duplicative state commissions, boards, agencies and departments – in short, there was no respect for the people of California.

Against all that, I give you my vet, Dr. Mike Eberhardt.  I’m going to a Rancho Santa Margarita Planning Commission hearing on his behalf tonight, to speak in favor of innovation and against the expensive repression of business that goes on so routinely in Crazifornia.

Dr. Eberhart’s clinic is in an industrial park, not a neighborhood.  An innovative vet, he built a fenced-in dog run behind the building, encircling it with an expensive wrought iron fence, in keeping with the design of other fencing in the park. He uses it to let dogs walk off anesthesia, and to better diagnose dogs.  He found that dogs on a metal table in a vet’s treatment room will mask their symptoms, but if he and the owner go out to the dog run, in a few minutes, the dog will drop the mask and a better diagnosis can be made.

Ah, but the city of Rancho Santa Margarita has a policy requiring a Conditional Use Permit for dog runs like his. And they’re recommending that the Planning Commission deny his application.  Overseeing dog runs may be a good idea if you’re attempting to regulate doggy daycare facilities, where such runs can create a lot of barking and a lot of poop.  But his dogs are there for one-on-one observation, are never left alone, and are cleaned up after, so it’s … well … an entirely different animal.

What’s logical to you and me is missed in the regulation-addicted mindset of California government.  How crazy is it?  Well, Dr. E’s spent over $20,000 to date on attorney’s fees, and will ring up a bunch more as his attorney prepares for and sits through tonight’s hearing.

Welcome to business in California – where every good idea gets the bureaucratic bum’s rush, and every good business gets taxed into oblivion.