December 1, 1995 -- Contact: Ron Roach
Improvement in the California economy is proving that those who advocated strategies for creating more jobs with tax incentives, workers' compensation reform and other business climate measures were right on the mark.
An economy fed by job growth is a healthier development for those who worry about the condition of the state's $44 billion general fund, which has been listed as critical in recent years.
During the first 10 months of 1995, according to state Department of Finance statistics, 320,000 nonfarm jobs were created in California. Sometime next year, the state will have recovered all of the 700,000-plus jobs that were victims of the recession that hit in 1990. The boom times of the 1980s are unlikely to be repeated, but the employment turnaround is good medicine for an ailing economy.
Those who watch employment figures were not surprised when Governor Pete Wilson's Department of Finance noted that state revenues -- personal income taxes, bank and corporation taxes, and sales taxes -- were coming in much higher than had been forecast last summer. The relationship between numbers of working taxpayers and the flow of tax dollars should not be lost on anyone.
Job growth increases revenues for government and reduces the cost for entitlement programs such as welfare. Increased tax rates, on the other hand, would make California less competitive with other states.
State revenues for the first four months of the current fiscal year, through October, exceeded expectations by $676 million, according to the Department of Finance. The Legislature's budget analyst also projects that revenues for the entire 1995-96 fiscal year will be $1.3 billion above Department of Finance projections when the annual budget bill was enacted last summer.
Credit for this improvement should go to policy makers in Sacramento whose decisions are changing California's business climate. Approval in 1993 of the investment tax credit for manufacturers sent a signal that California means business. Reforms of an out-of-control workers' compensation system told job-creating businesses that California was cleaning up its act.
A research and development tax credit was penciled out to save taxpayers $20 million a year -- a relatively minor amount when you're talking billions of dollars. However, an R&D credit sends a message around the world that high technology industries of the future can have a home in California. Fostering growth in these industries is a key strategy in California's economic future.
Last March, when Cal-Tax issued strategies for economic recovery, it urged policy makers to take steps that would improve the state's sagging fiscal condition without raising tax rates. Cal-Tax stated that 400,000 new jobs would result in $2.4 billion in increased state and local revenues, based on figures which show that state and local taxes and fees average $6,000 per worker.
Besides the legislative analyst's $1.3 billion projection for additional state revenue in the year ending next June 30, it is quite likely that additional revenue will be collected by local governments as a result of this economic surge. Business license taxes, sales taxes, and other exactions increase with improved economic activity.
Another recent development reinforces the positive effect of an improved business climate. The California Business Roundtable noted that nearly half of the companies that responded to a recent survey said they intend to hire more workers in 1996. This sharply reverses a trend seen in similar surveys only a few years ago.
The ball is rolling. To keep it rolling in the right direction, the Legislature and the Wilson administration in 1996 must continue to be vigilant in their quest to produce and maintain a tax structure and business climate that are competitive with other states that try to lure away California's jobmakers.