Family businesses can’t be left holding the bag

In recent months, there’s been a lot of attention paid to some high-profile California businesses who have decided to move some or all of their operations to lower-cost states.

Oracle, the second-largest software maker in the world, is moving its corporate headquarters from Silicon Valley to Austin, while Hewlett Packard Enterprise – whose founders launched the tech revolution from a Palo Alto garage in 1939, is decamping to Houston.

Ken MonroeBut it’s not just tech companies heading for the door. Between 2008 and 2019, some 18,000 companies left for states with better tax and regulatory policies, according to Spectrum Location Solutions, a firm that specializes in helping California companies move elsewhere.

As the president and CEO of a family business launched in 1931 and chairman of the Family Business Association of California, my fear is more large companies will decide that our state’s ever-increasing taxes and regulations have reached the breaking point and follow suit – and that state officials will look at family businesses to make up the difference.

There are about 1.4 million family businesses in California. Nationally, family businesses employ 63% of the workforce and create 75% of all new jobs. The members of our association are a broad mix of businesses, ranging from two employees to over 20,000, but on average they employ about 700 people. And we’re committed to California. 13 of our members have been in business for more than 100 years, and the median for all members is 54 years in operation.

But even for California companies profitably run by families since the Beatles topped the charts, there comes a point where the costs become too much.

Take our taxes. California has the highest corporate income tax in the West, at 8.84%. And for members that are S corporations, partnerships or sole proprietors, they pay their business taxes at the rates for individuals, which top out at 13.3% - again the highest in the nation.

California’s extremely progressive income tax structure means that the top 1% of taxpayers pay nearly half of the tax. So if more big corporations and their top executives move operations to low- or no-tax states, state revenues will plummet. Since our progressive Governor and Legislature believe no government program should be reduced or – heaven forbid – eliminated, that means they’ll be looking for higher taxes from the businesses and business owners who remain.

In fact, they’re already trying. Bills were introduced last year would have raised the top rate to a staggering 16.8% and established the nation’s first wealth tax on individuals’ net worth. Supporters said the two measures would have raised over $14 billion and while neither passed last year it’s likely both proposals will be reintroduced this year.

And those taxes are on top of sales taxes, which are 7.25% at a minimum and top out at 9.5% in many cities and counties and in a few extreme cases are 10% or more. And don’t forget our 50.5 cents per gallon gas tax, again the highest in the nation – and that doesn’t include the additional 11 cents per gallon California’s climate change efforts increase gasoline prices.

California family businesses do not want to leave. We have deep roots in our communities. But if our policy makers keep driving giant companies and their executives out of state, we know they’ll be looking to us to fill the void in the treasury. And if that happens, many of our companies will have to take a hard look at pulling up those deep roots and replanting themselves in more fertile soil.

This op-ed originally appeared in the Orange County Register and other Southern California News Group publications on February 15, 2021

State Officials and Unions Will Never Have All the Money They Want

By Ken Monroe, FBA Chairman and president of Holt of California

The following commentary was posted on Fox & Hounds on October 21, 2020

Proposition 15, the split-roll property tax measure on the November ballot, would seriously affect family businesses throughout the state by raising taxes on commercial property by an estimated $11.5 billion a year. As the owners of family-owned Holt of California and chairman of the Family Business Association of California, I know how hard it will impact our companies.

Ken MonroeThe measure’s proponents were arguing that the state faced a financial crisis and needed to double or even triple taxes on businesses large and small even before the COVID-caused recession hit and the economy was doing well.
In fact, this supposed financial crisis is not new and it’s never been solved to the satisfaction of public employee unions and their supporters in Sacramento despite a long line of tax increases.

Proposition 98 in 1988 (mandatory education spending) wasn’t enough, so then there was Proposition 30 in 2012 (“temporary” taxes to fund state programs). But that wasn’t enough, either, so along came Proposition 55 in 2018 (which made those “temporary” taxes permanent). But even that wasn’t enough, so now comes Proposition 15. Will this be the end? No, and if it passes and causes property taxes for commercial property to skyrocket, you can be sure that a push to increase residential property taxes won’t be far behind.

So what crisis are we facing? Proponents of Proposition 15 say they want to provide a better education for our children. But the funds would really be used to bridge the gap between available funds and what’s needed to pay for government employees’ generous retirement benefits. Only about 30% of the new taxes would go to schools – and could be used for pension obligations. The rest would go to state and local governments, which could spend the money however they choose.

A large part would undoubtedly be spent to backfill that multi-billion dollar unfunded pension liability. Because retirement spending has grown faster than revenues, funding for many government programs have grown more slowly. Absent reform, retirement spending will continue to grow faster than revenues even after the recession ends.

Before we add another tax to California family businesses, let’s see structural retirement spending reforms.

Proposition 15 would hit almost every business hard. Proponents say it exempts agricultural land, but it would increase taxes on improvements to farmland such as barns, buildings, processing areas and even some of the crops grown. They also say it would exempt small business, but that’s simply not true. The triple-net leases commonly used to rent stores and offices require tenants to pay real estate tax, building insurance and maintenance cost increases. If property taxes go up, so does the businesses’ rent.

If Proposition 15 passes, most family businesses will be forced to reassess our budgets and find ways to pay the higher taxes. But family businesses can’t simply wave a magic wand and increase sales or raise prices to cover those increases, so there will be less money available for employee raises and company growth. We will have to restructure our businesses to survive and compete, unlike the public employee unions that will not budge when it comes to reforms.

California businesses already have the highest tax bills in the country and imposing a massive tax increase like this means many long-time family businesses will not just think about leaving the state, they will do so.

And that would cause the public employee unions to look for other revenue sources to “solve” the Never-Ending Financial Crisis. Please vote no on Proposition 15 and let family business grow and provide the jobs California needs to expand the economic good for all.