Friday, January 25, 2013

California: A Shrinking Economic Kingdom


 California: A Shrinking Economic Kingdom




The story of the Sacramento Kings is sad in and of itself but it mirrors a larger saga unfolding in the once great State of California.  The current economic conditions of the State and the response of California's lawmakers have created a grand incentive to leave the state, and now those chickens are coming home to roost. 

The Sacramento Kings are currently up for sale and in danger of leaving California for greener pastures, possibly to Seattle, Washington.  The Kings have been a vagabond franchise overall but have played in Sacramento since the 1985-86 season.  Before that the franchise had success in a few locations including Kansas City, Rochester, and Cincinnati.  The franchise enjoyed moderate success since landing in Sacramento and build up a lot of capital within the community and among the fans.  In the mid 1990's the franchise was at its pinnacle of success. The team finally had a permanent home and a healthy cash flow and fan support.  Years or poor business decisions, arrogance, and the economic recession took their toll on the Malouf family finances and they found themselves backed in to a financial corner.  Now they are looking for an out in a fashion that mirrors the economic reality in the State as a whole.


As the Maloufs consider their next move, the City of Sacramento and the State of California is again faced with a new reality for the State, mass economic migration.  According to the Texas bizjournal and the Bloomberg News migration from the State is focused in Texas, Arizona, Florida, Oregon, and Washington.  Make no mistake the fact that these states (excluding Oregon) all have no income tax, does play a role in the migration patterns.  In fact all of these states have no income tax and are in the top 10 of all state growth rates. (http://www.manhattan-institute.org/html/cr_71.htm#.UQLm22e54oE)

Along with the wealth migration, businesses are starting to leave the state as well as alluded to in the OC Register (http://www.ocregister.com/articles/moved-342887-companies-texas.html).  Campbell's Soup (http://sacramento.cbslocal.com/2012/09/27/campbell-soup-is-shutting-down-sacramento-plant/) has decided shut down operations within California, joining the rising tide of other businesses deciding that California is not worth the costs:
  • Bazz Houston Co.Garden Grove, moving jobs to Tijuana 
  • Ditech, Costa Mesa, moved most work and jobs to Fort Washington, Pa.
  • eEye, Irvine, expanding in Phoenix where the executive team is
  • Imperial-Newton Inc., Huntington Beach, moved to Centennial, Colo.
  • InsulTech LLC, Santa Ana, moving to Evanston, Wyoming
  • Kulicke & Soffa Industries Inc., Irvine, expanding to Malaysia and Singapore
  • Kyjen Company, Huntington Beach, moved to Centennial, Colo.
  • Lennox Hearth Products Inc., Orange, moved jobs to Nashville and Union City, Tenn.
  • Maxwell America, Santa Ana, moved to Hanover, Md.
  • MotorVac Technologies, Santa Ana, moved to Ontario, Canada
  • Paragon Relocation Resources, Rancho Santa Margarita, moved to Dallas
  • Pixel2Canvas, Lake Forest, moved to Las Vegas
  • TriZetto Group Inc., Newport Beach, moved headquarters to Greenwood Village, Colo.
  • True Games Interactive Inc., Irvine, moved headquarters to Austin, Texas
  • U.S. Olympic Committee, Irvine, moved international relations office to Colorado Springs, Colo.
  • US Airways closed maintenance station at John Wayne Airport
  • Workforce Management, Irvine, moving to Chicago.
Some critics will point to the fact that most of the businesses leaving the state are small businesses (defined differently by state).  A report by the Small Business Administration (SBA) details that fact that a great majority of job growth is initiated by small businesses (http://www.sba.gov/sites/default/files/files/an%20analysis%20of%20small%20business%20and%20jobs%281%29.pdf).  

As a state loses its small business base, the prospects for economic growth decrease significantly.  This is the case of California and without significant small business growth, it is unlikely the job market will keep up with the population growth.  Without adequate grown in career level jobs, the strain on the State welfare resources will continue to handicap the economy.




Even companies that aren't based in California are choosing to avoid expansion in the State.  Companies that have chosen not to invest further in California include Intel (Ore) and  McAfee in particular have opted to invest in other states where the cost of doing business is lower.   

As California continues to decline in economic viability the politicians are faced with a series of choices that determine the States Future.  So far, Governor Brown has opted to solve the budget issues with a series of tax increases not only on the rich but on many middle income residents as well as most consumers.  As the data shows, this is exactly why many people (particularly those with wealth) and businesses are leaving the State.  Wealth is a commodity that is valued by any rational, free thinking individual.  If that individual is scheduled to face a number of tax increases they will look in to alternatives.  Just by moving to a income tax free state, that individual could realize as much as a 30% raise in income just by moving.  This is a powerful incentive to leave California for "greener" pastures.  

The derivative problem with the mass exodus of top end income earners is tax base erosion.  Tax base erosion occurs when a municpality either loses the ability to tax an entity or loses that taxable entity all together.  In California, the local and state government is realizing tax base erosion in the income, business, and sales taxes. (http://www.dof.ca.gov/finance_bulletins/2012/december/)
When a "rich" individual leaves the State, that State not longer can tax them unless then return and purchase something or starts a business.  Under this condition, not only does the State lose the income tax revenue,  but the individual will no longer pay property or sales taxes as well.  This is a huge loss give the number of high income earners reside in California and the amount of tax revenue their activities generate.  

When a business leaves the state the effects can be significant.  When a business leaves, the jobs go with it and if it is a large business many jobs will be lost, and if it is a small business, the potential for job growth and investment leaves as well.   Like with the individual, the State will lose payroll, corporate, property, sales, and income taxes, if the business relocates.  It is in the best interest of the State to retain and attract both individuals to the state to increase overall tax revenues.  California has decided that the way to to this is by increasing taxes and fees on them.  Texas, Florida, Washington, and Arizona are all greatfull for this windfall of tax base expansion.

Most businesses and individuals will look at their total tax burden as a deciding factor in their relocation plans.  Not surprisingly (as of 2010, prior to prop 30 tax increases) California's tax burden was only bested by 3 other states (New York, New Jersey, and Connecticut). (http://taxfoundation.org/article/state-and-local-tax-burdens-all-states-one-year-1977-2010).  It is not hard to see that California has reached  breaking point where no amount of tax increases will fill the fiscal hole.  Further tax increases will only encourage further migration and tax base erosion.  As the tax base erodes, fiscal engine of the government will break down and without reform, bankruptcy becomes a reality.

California does not have to follow this path, but it is hard to say if the State and local government's have the political fortitude and leadership to ensure that the citizens of California have a future in the State.  It may sound clique' but the road to redemption includes:
  • A consistently balanced state budget
  • Consolidated government and program elimination
  • Public benefit restructuring (public pension and healthcare benefits)
  • Reduction of taxes on small to medium businesses to encourage start ups and relocation
  • Tax incentives for the start up and the relocation of businesses and individuals      
 These and other tough measures will begin to right the fiscal ship, return economic hope, and reduce the cost of living in one of the most beautiful states in the US.  
The Sacramento Kings fate is not the direct result of California's fiscal policy, but they serve as a symbol of the direction of the States economy.  Soon, this once prosperous business will leave the state, leaving the state one less revenue stream and a city further in debt.
So as with the Sacramento Kings, the economic king that was once California is looking for a new kingdom, and the subjects are left to pick up the pieces. 


This chart from the US Census speaks volumes:

 


Other references:

http://jan.blog.ocregister.com/2010/07/16/84-companies-added-to-leaving-california-list/41399/companiesleavingca/

 http://www.foxbusiness.com/on-air/varney-co/transcript/companies-bid-farewell-california#ixzz2J1FnpxZF

http://www.gallup.com/poll/160100/healthcare-costs-taxes-worry-small-businesses.aspx

1 comment:

  1. As someone who spent the first 45 years of his life living in California, I'd have to agree, it's a nice place to be from.

    ReplyDelete