2018 California issues in a nutshell

by John Frith | Jan 7, 2018 | Blog

By Robert Rivinius, FBA Executive Director

In addition to the FBA priorities for 2018, here are some other issues that will impact businesses and the people of California in the coming year:

PAGA – the Private Attorneys General Act has been a disaster for many businesses in California. It can cost hundreds of thousands or millions of dollars to settle PAGA claims with the great majority of the money going to the state and the plaintiff’s lawyers while the supposedly harmed employees receive little. The Legislature has refused to deal with the issue, so a coalition of business leaders, including FBA, have been developing a ballot initiative to deal with it. Such initiatives are very costly including gathering qualifying signatures and then running an effective campaign. Fundraising is a major issue, as always.

Poverty – even though the published unemployment rate in California is around 5 percent, the gap between the “haves” and the “have nots” continues to widen, which is not a healthy situation for California. One gubernatorial candidate, Democrat Antonio Villaraigosa, has called for a revamping of California’s “Byzantine and bureaucratic regulatory framework” that impacts all businesses in the state. The hidden costs of doing business in California hits those below the poverty line especially hard.

Taxes – in addition to the proposed California estate tax measure, there will be other tax issues in play. There is never enough money for those in the public sector and they will be looking to weaken Proposition 13 by creating a “split roll” where commercial properties would pay taxes based on current market value. Such a scheme is estimated to create a $9 billion windfall and the costs would have to be passed on to consumers if businesses were to stay viable. In addition, much of California’s budget money come from the top 1 percent of earners through the personal income tax, which tops out at 13.3 percent. With the recent federal tax reforms, this will create yet another problem for California, with lots of creative solutions being kicked around, many of which don’t make much sense.

Housing – California needs hundreds of thousands of new housing units for its nearly 40 million residents. The recent efforts of the Legislature to solve the problem are more of a Band Aid than a cure. When you add in the new federal tax limitations on deductibility of property taxes and mortgage interest, you only exacerbate the problem.

Transportation – even though promising in his 2010 campaign that there would be no new taxes without voter approval, Governor Brown last year signed legislation that added 12 cents per gallon to the gas tax, 20 cents per gallon to the diesel tax, and created additional vehicle fees. There is an effort underway for a referendum on that legislation and polling for the repeal runs as high as 75 percent in favor of it.

Education – nearly half of California’s discretionary funds go to education, but there is still much to be desired in the ultimate success of students. Rather than push for reforms that would better spend the available funds, organizations like the California Teachers Association (union) just keep pushing for more money.

Public Pensions – With hundreds of billions of dollars of debt hanging over state and local governments due to the unfunded liability of public pension funds, something will have to give at some point.

In addition to all of this, we have other major issues like crime, healthcare, and the environment to deal with. It makes one wonder if California is a governable state, but organizations like FBA will keep fighting to make improvements for the business climate in the Golden State and do our best to kill proposals harmful to family businesses.

New laws employers need to be aware of

by John Frith | Jan 2, 2018 | Blog

By Dennis Albiani, FBA Legislative Advocate

January 2018

California leaders continue to pile requirements on employers. A minimum wage increase, more paid family leave, and more scrutiny in hiring practices are just a few issues that were enacted into law as of Jan. 1.

The statewide minimum wage went up by 50 cents per hour to $10.50 per hour for employers with 25 or fewer workers and to $11 per hour for employers with 26 or more employees. That increase was mandated under a 2016 law that is gradually increasing the minimum wage to $15 per hour. Be aware, some cities have higher minimum wages.

California employers can no longer ask most job applicants about their criminal records until a conditional offer has been made, and can’t ask any job seekers about their salary history unless the applicant volunteers this information, according to two new workplace laws that will have broad impact when hiring new employees.

AB 168 prohibits all public- and private-sector California employers from asking about a job applicant’s current or prior salary in job applications, interviews, and through outside recruiters. They also cannot consider salary history in determining whether to hire someone, unless the applicant voluntarily discloses the information. It also requires employers to give an applicant, upon request, the pay scale for the position. The main goal is to stop the perpetuation of gender pay gaps from one job to the next.

Experts say the most significant new law impacting hiring is AB 1008, the California Fair Chance Act. It prohibits employers with five or more employees from seeking information about a prospective worker’s criminal history in job applications or interviews or running a criminal background check until a “conditional offer of employment” has been made. The goal is to reduce recidivism by preventing employers from rejecting ex-offenders out of hand. The law exempts certain positions, such as those where a criminal background check is required by law.

Another new law, SB 63, requires California employers with 20 or more employees to give up to 12 weeks of unpaid, job-protected leave to eligible workers to bond with a new child. They also must maintain the employee’s health coverage during this baby-bonding leave. Employers with 50 or more employees already have this requirement. Mothers and fathers, including foster and adoptive parents, can take it. Some employees may get partial pay for up to six weeks during this leave through the state’s Paid Family Leave program. Baby bonding must be taken within 12 months of the child’s birth, adoption, or foster placement.

Please discuss new laws and compliance with legal counsel and your human resource professional. With the Private Attorney Generals Act (PAGA) liability, employer exposure is significant.

Food tax bills set for hearing January 8th

Two pieces of legislation authored by Assembly Member Cristina Garcia, D-Bell Gardens, would dramatically reverse a policy that voters established in 1992. AB 274 and ACA 2 attempt to reinstate state and local sales taxes on candy and processed snacks. They are scheduled to be heard in the Assembly Revenue and Taxation Committee next Monday. It is important to note that the current chair of the committee who had expressed grave concerns about the two bills recently resigned.

In 1991, during extreme fiscal challenges for the state, legislators enacted a “snack tax” but it immediately became apparent that arbitrary taxes on food products was difficult to enforce, define, and implement. Consumer frustration led to the passage of Proposition 163 in 1992. Prop. 163 prohibited via the California Constitution state and local sales taxes on any food and water products; the essentials of life. One of the main arguments to voters was that food taxes are regressive and fall most heavily on those who are least able to afford them, whether those taxes are imposed on “candy,” “processed snacks,” or other foods. AB 274 and ACA 2 reopens these issues to collect a tax that would be allocated to public health actions and diabetes.

The legislation would impose new taxes on “candy or confectionary” items and “processed snacks.” There are concerns about how the bills’ definitions would be implemented. To cite just a few examples, food items labeled as candy would be taxed unless they are made from maple sugar and labeled as candy, in which case they would not be taxed. Granola would be taxable in some cases, yet granola cereal bars are specifically exempted from taxation. A candy bar would be taxed but a frozen version of the same product would be exempt. Making sense of contradictions like these will present government tax agencies with an enormous amount of work as they attempt to provide guidance for retailers.

The Association is working hard on the issue and trying to ensure the definitions are precise and to oppose “taxes” on key California foods and commodities.

The Late Great Mortgage Interest Deduction

by John Frith | Nov 7, 2017 | Blog

By Elliot Eisenberg, Ph.D., GraphsandLaughs, LLC
November 2017

With the possibility of tax reform and tax cuts right around the corner, it is important to understand how the proposed doubling of the standard deduction will impact households and will essentially render the mortgage interest deduction irrelevant for almost all US home owners.

The current Republican plan raises the standard deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly. While the much larger standard deduction looks very advantageous, the new tax plan eliminates the personal exemption, which is currently $4,050/person. This means that the increase in tax-free income rises by just $1,600 ($12,000 - $6,350 -$4,050) for single filers and by $3,200 ($24,000 - $12,700 - $8,100) for married couples filing jointly. While these sums are not trivial, they are also not as large as advertised.

The Unified Framework developed by the White House and the Republicans also proposes eliminating all itemized deductions except for mortgage interest and charitable donations, and state and local property taxes up to a cap of $10,000. While this appears to largely maintain the status quo, think again. Traditionally, tax filers added up mortgage interest, charitable donations, state and local taxes, and healthcare expenses. If those deductions (the most commonly used) collectively exceeded the standard deduction, itemizing would make sense and one’s tax burden would decline.

Now, not only is the standard deduction almost doubling, but the deductibility of state and local income taxes and healthcare expenses is being eliminated. This means that to itemize, the sum of mortgage interest paid, charitable contributions, and property taxes must exceed $24,000. Few married couples hit that threshold. I estimate that no more than 6 percent of all households will itemize under the proposed plan compared to about 27 percent today.

Moreover, the deductions of those who will still itemize will be worth less than before. This is because the tax advantage of itemizing depends entirely upon how much one’s itemized deductions exceed the standard deduction and one’s marginal tax rate. Given the increase in the size of the standard deduction, the amount by which one’s now smaller itemized deductions exceed the newer, higher standard deduction will necessarily fall. And, as lowering tax rates is a part of this plan, the after-tax tax savings from itemizing will necessarily decline as well.

As for the mortgage interest deduction, I estimate that the percentage of households that currently own their home and will still be able to deduct mortgage interest will fall from the current level of about 33 percent to about 7 percent.

Here is an example to show why. Suppose a husband and wife have $20,000 in itemized deductions including $8,000 for state and local income taxes, $2,000 in charitable donations, $2,000 in property taxes, and $8,000 for mortgage interest. By itemizing now, that couple can reduce their taxable income by an additional $7,300 ($20,000 minus $12,700, the current standard deduction).

If in the 25% tax bracket, the tax savings on that additional $7,300 are $1,825. But, as state and local income taxes will no longer be deductible, this couple would then only have $12,000 in deductible expenses. As that is lower than the $24,000 standard deduction, they would not itemize despite paying $8,000 in mortgage interest.

This inability to deduct mortgage interest, despite it being technically deductible, will make home ownership slightly less appealing, and that will reduce the demand for home ownership, thus lowering house prices. To be specific, house prices are likely to fall by between 5 percent and 10 percent, with the decline increasing the more expensive the house and the higher the bite taken by both state and local income taxes.

By nearly doubling the standard deduction and doing away with several key itemized deductions, the proposed Republican tax plan will, if it becomes law — and that is still a big “if” — reduce the value of itemizing and the mortgage interest deduction even though mortgage interest will remain deductible. And that will lower house prices.

Have a wonderful Thanksgiving, a merry Christmas, and a happy 2018 and see you in January!

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com. You can subscribe and have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.

Fear Not Robots, Artificial Intelligence, or Algorithms

by John Frith | Oct 10, 2017 | Blog

By Elliot Eisenberg, Ph.D.

October 2017

Almost daily, we hear that robots, machine learning, and automation will destroy jobs — and not just a few, but tens of millions of them, and soon! Some experts predict that 47% of all US jobs are at high risk of disappearing over the next few decades due to computerization; others predict even more dire outcomes. Doomsayers suggest that “this time is different,” and that the technological apocalypse to come will be so profound that we are on the precipice of an employment crisis. I doubt it — just think about electricity and how disruptive it was, or how farming was transformed by mechanization and massive consolidation, yet employment growth in both cases hardly skipped a beat.

This pessimism would be at least plausible if there were a shred of evidence to support it! While the US economy has numerous problems, job creation is not one of them. Nonfarm employment and has risen for 87 months in a row, and job growth has been twice its sustainable level for years, driving the unemployment rate down to its best level in decades. Moreover, labor productivity growth, which should be skyrocketing because of all these robots and automation, is, in a word, abysmal.

In fact, going back to 1850, job creation and destruction, as measured by job losses in slow-growing occupations and job growth in fast-growing ones, is at its lowest level on record! There are two main reasons for this: first, the past was much more convulsive than we think. The arrival of the steam engine, cotton gin, and internal combustion engine, wrought economic havoc on the labor force as they were deployed. Ditto for the railroad and the mechanical switchboard. In fact, adjusted for labor force size, 57% of the jobs that workers performed in 1960 no longer exist!

As for the second reason, because Americans now consume substantially more services than in the past, and because the goods they consume are less easily automated, technological disruption moves much more slowly than before. That is, massages and boat cruises are services that are very labor intensive and cannot be automated, and even goods such as artisanal cheese and free-range eggs lend themselves to less automation than the manufacturing of American cheese slices and amusement park rides. As a result, robots and artificial intelligence can replace a lot less economic activity than we might think. And this is likely to continue. Just consider for a moment the likelihood of a parent leaving their young child in the care of a robot.

Lastly, in low productivity growth areas such as education, healthcare, transportation, and construction, where jobs are largely performed the same way they were decades ago, the productivity gains from technology can’t come fast enough and may well be economically transformative. If suddenly millions of truck, bus and taxi drivers are freed up to do other tasks that are more productive, that would be an economic boon. Similarly, if residential construction, where there been have no productivity gains at all in decades, can use robots to build homes better and faster, we will all be better off. Otherwise, our ever-tightening labor market and aging population will cause wages to rise and growth to decline. In short, we need technology to destroy more jobs more quickly.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com. You can subscribe and have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.