Thanks to the hard work of employers and businesses, the state has seen excellent growth and is flush with revenue.
On this episode of The Workplace, CalChamber President Allan Zaremberg talks with Loren Kaye, president of the California Foundation for Commerce and Education, about the private sector’s role in creating a record state budget surplus. On the heels of the Governor’s May Budget Revision, the two provide in-depth perspective on the wisdom of California’s spending priorities, especially given the state’s volatile tax system. Zaremberg and Kaye also provide recommendations on how the state can protect both its economy and job creation well into the future.
State of the State Budget
“The economy just doesn’t know when to quit,” Kaye tells Zaremberg. In fact, employers are having trouble finding workers, he says.
The current budget surplus stands at about $21 billion, almost $9 billion of which is derived from taxes on wealthy Californians. Most of the budget is slated to pay down debt or go into the Rainy Day Fund, with very little of it being set aside for new spending, Kaye says. Still, the $200 billion budget increases state spending, especially in education, which is being allotted more than $100 billion from state and local taxes.
Economic Volatility
Despite the glowing economy, the state is still at risk for a dramatic downturn in the future because the state is so dependent on corporate tax revenues and on high-income earners doing well in capital gains, Zaremberg warns.
“A huge part of the tax revenues from the wealthy comes from capital gains…profits from the stock exchange…sales of assets…But should the economy slow down…Kaput! That stuff just disappears, and that’s when we run into budget deficits,” Kaye tells Zaremberg.
Even with a mild recession, Kaye adds, state revenues can go down by $70 billion over three years. This year, corporate tax revenues were very strong in part because of the federal tax reform. But in a recession, Kaye points out, corporate tax receipts go down and high-wealth individuals can experience reduced incomes due to the stock market going down, real estate prices leveling off or the value of other assets not appreciating.
“Then you’ll see real, real damage to the state budget,” he says.
Spending Priorities
For the first time, K-12 education in the state is receiving more than $100 billion in funding. Higher education also is expected to see an increase in funding, Kaye says, and Governor Gavin Newsom has proposed making the first two years of community college tuition free.
This is a good investment that will come back to benefit the business community, Zaremberg says, if it prepares the state workforce for the jobs of the future. Kaye agrees.
“One of our strongest competitive advantages in California is our skilled workforce. But that requires the school systems to continue to produce well-qualified students…” Kaye adds. “The shortage of a skilled workforce in California is probably the biggest threat that we have to continued growth, apart from what happens in the national economy.”
There is a real need to produce and import more skilled workers, Kaye continues.
“There are more job openings in the state than there are unemployed people,” he says.
Other spending areas that will invest in California’s future and benefit the business community include funding: highway and road construction, waterways, sewage and waste systems, utility systems, health care, and communication/internet infrastructure.
All of these areas are essential to growing the economy and keeping the business community viable, Zaremberg says.
“Also, when you make these good investments in a skilled workforce and infrastructure, it keeps businesses here, economically productive, profitable, and tax-paying that will reduce the need for higher taxes in the future,” Kaye adds.
But not all areas of California are seeing as much growth as others, particularly inland cities and towns. Zaremberg asks, “Are we leaving part of the state behind with this economic growth?”
Indeed, inland California has not been seeing the growth that metropolitan and coastal California has been experiencing. These areas need education and infrastructure investment so that they are uplifted in the way metropolitan and coastal California have been uplifted, Kaye says.
In closing the podcast, Zaremberg emphasizes that these investments are possible thanks to the revenue delivered by California’s businesses.
“The government has turned around a deficit, but it’s been due to the growth in our economy—due to the growth in the revenues of high-wealth individuals and their taxes,” Zaremberg says. “But most importantly, if we can ensure that those revenues get reinvested back into our workforce and into our infrastructure, we can certainly keep this economic growth moving forward.”
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