Update: This post originally misidentified the state agency for which Allen Prohofsky works. He is with the state Franchise Tax board. — Oct. 16, 2012, 5:55 pm.
With the November election staring us in the face, we’re bound to hear a lot more arguments about taxes and whether they are killing California businesses. There are at least two major statewide tax measures — props 30 and 38 — on the ballot and local governments are sticking their hands out, too.
Anti-tax crusader Jon Coupal and business backer John Kabateck weighed in on the Mercury News‘ op-ed page this week with a piece that said that the state’s nice weather and sandy beaches can’t “keep individuals and businesses from fleeing the Golden State in droves in search of low-tax business-friendly states.
The piece implies that Gov. Jerry Brown’s Prop 30 would make matters worse by raising some taxes. The article doesn’t exactly say that and I’m guessing that’s because the prediction is hard to support. Instead, Coupal and Kabateck cite a Manhattan Institute study that shows California residents are moving to other states. Residents? I thought this was about businesses.
The truth is there is evidence that businesses don’t put a lot of weight on taxes when they are deciding whether to remain in the state. I know it sounds counter-intuitive, but a study that the California Public Policy Institute has been revisiting for years indicates that only 1.7 percent of the jobs lost in California between 1999 and 2006 were lost because businesses moved out of the state.
Jed Kolko, the report’s author, concludes:
“Few businesses move into or out of California. From 1992 through 2006, about 16,000 jobs annually moved into California and about 25,000 jobs annually moved out of California. The annual net employment change in California due to relocation—a loss of about 9,000 jobs—represents only 0.05 percent of California’s 18 million jobs. Most employment gains and losses are the result of other factors.”
Most job gains and losses in the state come about because of businesses starting up or shutting down, the report says. Here is Sacramento Bee columnist Dan Walters take on the report. Walters points out that Kolko concluded that California is actually better than average when it comes to losing jobs to other states. He ends with an important point: That there is no way to know if California’s tax rates are causing businesses to start up elsewhere rather than in California.
And consider the argument put forth by UC-Berkeley economist Enrico Moretti in his fascinating new book “The Geography of Jobs.” Moretti says both people and companies are drawn to innovation clusters (such as Silicon Valley) that have a concentration of smart people doing ingenious work.
Companies are even willing to pay higher wages and salaries for the benefit of a brilliant workforce. Moretti begins to illustrate his point by comparing two California communities — Menlo Park and Visalia — through the eyes of David Breedlove, an engineer who moved from Menlo Park to the quieter Visalia in 1969. Moretti writes:
“Today the two places could not be more different, but not in the way David Breedlove envisioned. The Silicon Valley region has grown into the most important innovation hub in the world. Jobs abound, and the average salary of its residents is the second highest in America. Its crime rate is low, its school districts are among the best in the state, and the air quality is excellent. Fully half of its residents have a college degree, and many have a PhD, making it the fifth best educated urban area in the nation. Menlo Park keeps attracting small and large high-tech employers, including most recently the new Facebook headquarters.
By contrast, Visalia has the second lowest percentage of college-educated workers in the country, almost no residents with a postgraduate degree, and one of the lowest average salaries in America. It is the only major city in the Central Valley that does not have a four-year college. Its crime rate is high, and its schools, structurally unable to cope with the vast number of non-English-speaking students, are among the worst in California. Visalia also consistently ranks among American cities with the worst pollution, especially in the summer, when the heat, traffic, and fumes from farm machines create the third highest level of ozone in the nation.”
Even John Engler, president of the Business Round Table, writing on the op-ed page of the very anti-tax, very pro-business Wall Street Journal seemed to say that tax policies are not a big driver of businesses location decisions. He wrote:
“While the tax code provides a deduction for all business expenses, including plant-closing costs, severance pay and worker retraining, the simple fact is that businesses don’t make relocation decisions on the basis of a tax deduction.”
It would be a shame if California is missing out on new businesses, the jobs they bring and the taxes they pay, but it’s also good to remember that current tax rates provide the money the state needs to function. And part of what the state does, through roads and other transportation systems, through education, through all sorts of enforcement activities and on and on, is allow businesses to prosper.
A few months ago, I talked to a state economist about this issue. He said in general he believed the issue of taxes is overstated when it comes to businesses deciding where to locate.
Allen Prohofsky, of the California Franchise Tax Board statistical research bureau, said he’s reviewed a number of surveys asking businesses how they decide where to locate:
“The top two answers are almost invariably, ‘Where are my customers? Or where are my suppliers? What’s the quality of the workforce? What’s the quality of the infrastructure?’ Usually you’ll find that state tax issues come up seventh or eighth when they make these decisions.”
As for companies leaving the state, because of taxes, think about it for a minute. Who pays taxes, Prohofsky asks? And answers:
“By definition, you only pay income tax if you have income. If you’re already profitable, there is a big incentive to keep doing what you’re doing where you’re already doing it.”
I’m not going to argue that high taxes don’t keep some companies away or cause some to move (as the California Public Policy Institute’s work show). I just think it’s important to consider the issue as part of a balancing act. The state must balance its tax rates with its responsibilities — educating its citizens, protecting its people from disease, helping those who are unable to help themselves, providing the infrastructure business needs to thrive etc.
In their Mercury News essay, Coupal and Kabatech wrote:
“But an honest discussion of business flight is perhaps what voters need to fully understand the damage Proposition 30 will inflict on California’s economic future.”
I submit this as part of that honest discussion, a part that allows that the damage the proposition will inflect might not be as grave as its opponents believe — or want you to believe.