California was once the land of opportunity. Since 1848 when John Marshall discovered gold in the Sierra Nevada foothills, people have flocked to the Golden State for jobs, sunshine and opportunity.
Now our nation’s most populous state with 37 million people has earned a tarnished image for high taxes, onerous regulations, government gridlock and unfriendliness toward business. That’s disastrous news for a state with the world’s tenth-largest economy at $1.813 trillion (gross state product).
That unsavory reputation is having its impact on the state’s beleaguered budget. These days, California’s unemployment rate is two points over the national average at 11.5 percent, and its unemployment insurance fund is broke. Gov. Arnold Schwarzenegger, R, is feverishly working to plug a gaping $15 billion hole in the state’s budget and has resorted to issuing IOUs.
Neither Schwarzenegger nor the California legislature has much taxpayer sympathy. In fact, voters showed their anger earlier this summer by handily rejecting tax increases to balance the budget.
So what’s wrong with California?
As The Economist magazine recently reported, “Back in its golden age in the 1950s and 1960s, it [California] offered middle-class people, not just techy high-fliers, a shot at the American dream-complete with superb schools and universities and an enviable physical infrastructure.”
“Indeed, high taxes, coupled with intrusive regulations on business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy,” the well-read British magazine added.
The Economist contrasted California to Texas, where unemployment is two percent below the national average, taxes are low and government regulations are more reasonable.
California’s core problem starts with a hobbled manufacturing sector. Manufacturing was the staple of California’s economy, but a recent Milken study comparing California with Arizona, Indiana, Kansas, Oregon, Texas, Minnesota and Washington quantifies the decline.
Milken’s findings confirm that California has developed a reputation for not being friendly to business, as exemplified by the state’s onerous regulatory climate and high taxes. According to its study, California lost 79,000 manufacturing jobs between 2000 and 2007, while its seven peer states added 62,000 manufacturing jobs.
Here is an example of why. Unlike California, Washington provides a sales tax exemption for new manufacturing machinery and equipment, research and development, and repair and replacement parts. California lawmakers have argued endlessly over extending the same sales tax exemption for manufacturers, but in the end nothing has passed.
That incentive is paying off in Washington. For example, REC Silicon in Moses Lake is spending $1.8 billion building new fluid bed reactors to produce high-quality silicon for solar panels. That unique technology was developed in Moses Lake.
REC’s high-tech manufacturing investment is adding more than 500 new high-paying, family-wage manufacturing jobs in Grant County and another 1,000 related jobs in the area. In total, the Grant County Economic Development Council estimates the project will add $81.7 million in earnings.
Milken believes the bottom line is that a business must be wanted in the state, in addition to offering trained workers and securing the necessary permits and operating licenses. In return, the state should provide a legal system that doesn’t perpetuate costly litigation, as well as workers’ comp and unemployment insurance systems that protect workers and curb abuses.
Milken notes that if California had maintained its share of manufacturing from 2000-07, it would have preserved 476,000 jobs, maintained $27.3 billion in wages and accumulated $46.9 billion in industrial output. While that alone may not have prevented the state’s current economic slide, it certainly would have cushioned the fall.
As Washington lawmakers prepare to tackle our state’s revenue shortfalls, deal with costly new proposals to increase unemployment benefits and reform health care, they need to remember that California is well on its way to killing the goose laying the Golden State’s eggs. Our elected officials would do well to learn from the mistakes of its tarnished West Coast neighbor and polish up their investment strategies for Washington state’s manufacturing base.