The Ueberroth Report:
Prepared in 1992, Report on Jobs Climate Still Contains Timely Advice

State policymakers seem to have exhausted just about every "solution" to patch up California's budget calamity in 2009. Since budget gurus are predicting that 2010 will be even worse, next year's budget "solutions" will have to look beyond the typical legislative playbook of gimmicks, spending cuts and tax increases. In preparation for next year, some Capitol observers are finding wisdom from the past specifically, the Ueberroth Report, which may produce possible ideas for improving California's jobs climate.

The Ueberroth Report, officially called "California's Jobs and Future," was published in 1992 by the Council on California Competitiveness, a 17-member, bipartisan commission with representatives from business, academia and politics. The report was commissioned by Governor Pete Wilson, who appointed Peter Ueberroth to chair the council.

When Governor Wilson came into office, the state had a deficit of $5 billion and a general fund budget of $42 billion. By the time he signed his first budget, the deficit had increased to $14.3 billion.

The report was largely the result of these massive budget shortfalls and an "abysmal business climate," as the former governor recalled in a recent speech to Cal-Tax. He said: "I had countless letters saying things like, 'I grew up in Glendale, went to school there, raised my family there, started my small business there I can no longer make a go of it in California. It costs too much to do business competing with people out of state who do not have similar costs.' Somehow that fact resonated with literally hundreds of thousands of small businessmen and women in this state."

He continued: "That fact never seemed to penetrate with the Legislature. In fact, when I would speak to legislators about these letters, one day a legislator said to me, 'Governor, all of that talk is bunk. You know California is irresistible to business.' And I said, 'Really? Tell me why.' He said because of our vast markets. I said, 'Did it ever occur to you that people can provide not just goods, but even services, from outside the state and just sell to all these vast markets?' It had not occurred to him."

Now, with California once again facing perpetual deficits and a recession, former Governor Wilson said, "I see history repeating itself, at least a certain cycle, which I don't think is inevitable by any means." In regard to the Ueberroth Report, he recalled, "I said to Peter, 'You know and I know what is wrong with California's competitiveness, you must go through and document what is wrong and what is necessary to fix it.'"

The problems identified by the Ueberroth Report include:

         Small and medium-sized businesses are discouraged from creating jobs.

         Manufacturers are subjected to excessive regulation.

         Employment is shifting from high-wage jobs to low-skill, low-wage jobs.

         California's prized industries are being outsourced to other states and countries.

To remedy these problems, the report proposed reforming California's small- and medium-sized business permitting and regulatory structure; changing the state's construction fee, permit and exaction process; and reforming the tax structure to allow entrepreneurs to invest in new ventures.

Several specific recommendations:

         Oppose Detrimental Initiatives and Tax Proposals. The report advises the state to oppose split roll taxation; change-of-ownership reassessments on corporate property that has 50 percent of its stock change hands; and any increases in the bank or corporate tax rates.

         Regulatory Streamlining. Provide sunset provisions on all environmental legislation to determine if a positive socioeconomic effect was gained from the regulation. The report also recommends that all state agency funding be allocated through the general fund since, as the report notes, many of California's self-funded agencies rely on fees and fines, or "de facto taxes," and this process "escapes the normal democratic budgeting process of the general fund."

         Capital and Economic Incentives. The bipartisan report recommends restoring California's net operating loss carryover provisions, eliminating unproductive tax credits, adopting a manufacturing investment tax credit and infrastructure construction tax credit, and eliminating capital gains taxation on new investments in small companies.

For the full report, click here.

Cal-Taxletter, December 18, 2009

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