Our guest contributor says that many family-owned businesses may leave California or sell out to larger corporations if Assembly Constitutional Amendment 1 becomes law.
California is notorious for being one of the worst places in the nation to do business. For years, businesses have dealt with the high cost of living, onerous and expensive regulations, complex employment laws and, of course, high taxes.
In fact, Chief Executive magazine consistently ranks the Golden State as having the country’s worst business climate, while the Tax Foundation ranks California 48th, ahead of only New York and New Jersey.
But thanks to Proposition 13, property taxes at least remain in the relatively moderate range and are predictable. In addition, local governments must obtain approval from two-thirds of the voters in most cases to raise local sales taxes, parcel taxes and general obligation bonds that are repaid via property tax bills. However, a proposal to make it easier to raise those taxes is quietly gaining momentum in the Legislature. Assembly Constitutional Amendment 1 last week was placed in the suspense file by the Assembly Appropriations Committee but is still very much alive and is scheduled for a hearing on Sept. 1. Should this constitutional amendment become law, it may well be the straw that breaks the back of many California family businesses. The California Taxpayers Association estimates that ACA 1 could increase local taxes by $255 million a year.
ACA 1 would reduce the two-thirds requirement for any “infrastructure” project with an easier-to-obtain 55% threshold. And the way infrastructure is defined, most tax increases would be covered. A fact sheet released by proponents makes it clear that raising taxes is the goal. It points out that just half of the tax proposals requiring a two-thirds vote are enacted, compared to 80% of school bonds, which can be approved with a 55% majority. Additionally, it notes that nearly 80% of tax measures needing a two-thirds vote received more than 55%.
While all businesses are affected by actions taken by lawmakers and regulators in Sacramento and at city hall, family businesses are often impacted especially hard. Most California family businesses are in the small to medium-sized range. Most don’t have the revenues that large corporations have to hire teams of lawyers and accountants to figure out the best way to cope with higher taxes and expensive regulations.
Family businesses should be supported, not burdened further. We are focused on the long term, not the next quarter. We are deeply rooted in our communities. And seven out of 10 family businesses have more than one generation of employee families working for us ⏤ loyalty few major corporations can match.
This isn’t the first time this measure has come before the Legislature, and in past years it failed to gain traction. This year, however, proponents of higher taxes seem to have momentum – even newly installed Assembly Speaker Robert Rivas is a coauthor.
As the Howard Jarvis Taxpayers Association puts it, “ACA 1 is a tax increase, and worse — it’s an engine to raise taxes over and over again in every local election, just by calling any government spending ‘infrastructure,’ even if it’s really for salaries, programs or to free up existing revenue to cover pension liabilities.”
If we lose the protections against higher property tax bills, on top of all the other factors that drive up the cost of doing business, you’re going to see more businesses leaving California or at least moving operations to more business- friendly areas. Family businesses that can’t move will be more likely to sell to larger companies that won’t necessarily have the same commitment to their communities and their employees.
And that would be a blow to communities supporting the measure that would be far greater than any increased tax revenue they might receive. We urge lawmakers to keep that in mind and defeat ACA 1.
Local governments want to make it easier to raise your taxes by reducing the majority needed from voters from two-thirds to just 55%. If passed by the Legislature this month, ACA 1 could appear on the 2024 statewide ballot. In an op-ed in the Sacramento Business Journal, I warn that if this measure becomes law, it could be the final straw for many California family businesses, in addition to all the other taxes, fees, and regulations the state imposes. FBA will always continue fighting to protect California family businesses at the state Capitol and we are urging lawmakers to vote no. You can read it here. (subscription may be required).
The Family Business Association of California is celebrating its 10th anniversary this year. While that may not be a record for longevity compared to many of the highly effective trade associations that have advocated on behalf of large and small businesses in California for decades, it is unique in that the FBA is the only organization that solely represents family businesses that have operated in California for as many as 100 years or more.
Too often, the interests of California’s estimated 1.4 million family-owned businesses – a critically important and large sector of California’s economy – were not considered as state officials made decisions about taxes, laws and regulations affecting the business community. Too often, as the old political saying goes, because family businesses weren’t at the table when these decisions were being made, we were on the menu. That’s especially true when it comes to perhaps our top priority – the need to keep our businesses family-owned from generation to generation.
The primary difference between family businesses in California and other businesses is our desire to stay in California, provide stable employment, participate in our local economies and take the long view of success. Family businesses are not bound by driving quarterly results but instead are generally focused on long-term financial success, satisfied customers and engaged employees. However, bills passed by the Legislature often do more harm than good to those many family businesses committed to our communities.
During its decade of working to promote family businesses in California, FBA has achieved a number of significant accomplishments, including:
Killing legislation to create a new inheritance tax that would have inhibited the passing of family businesses to the next generation.
Introducing legislation to add a definition of family business to state law.
Stopping proposals to limit how families move assets.
And helping defeat the “split-roll” property tax initiative and “single-payer” health care proposal, both of which would have cost our members billions of dollars per year.
These victories were important because the success and continuation of family businesses are essential to our state’s future prosperity. Studies have shown that nationally, family businesses generate 57% of the nation’s GDP, employ 63% of the workforce and create 75% of all new jobs.
Furthermore, in addition to our economic impact, family businesses serve as the foundation for our communities. Studies show that we engage in higher levels of philanthropic giving, donate more to local causes and have better records of environmental stewardship than businesses as a whole. In addition, we tend to invest more in our employees’ training and benefits, are more likely to promote women to executive management and are less likely to lay off workers in tough economic times.
Unfortunately, our elected officials and regulators need to be working to make it easier, not harder, for these essential companies to grow and thrive. Too often, however, that is not the case. Over 2,000 bills were introduced during the most recent legislative session and, according to CalTax, those with a fiscal impact would have imposed more than $198.9 billion a year in higher taxes and fees. As the 2023 session draws near, the state is looking at a projected $25 billion budget deficit that would grow much larger if the state and nation enters a recession. It is inevitable that many lawmakers will seek to increase taxes and add more regulations.
It is well documented that these taxes and regulations drive many businesses out of California leaving the deeply rooted family businesses of California as an even more important foundation for supporting our local economies. However, while it is becoming more difficult for us to successfully operate, many legislators seem to think that we will always be here no matter what they do, making profits that can be taxed.
So FBA will continue working with partners in the business community and with business-friendly legislators from both parties who understand that adding more and more complex and expensive requirements will only further damage our economy and our quality of life.
And that’s why FBA will ensure that family businesses remain at the table, and not on the menu, in Sacramento
Monroe is president of Holt of California and Chairman of the Family Business Association.
The ongoing debate about businesses moving out of California rages on, with business groups pointing to the number of headquarters moving out of California and many of our politicians pointing to California’s rank as the fifth-largest economy in the world with tech start-ups still growing.
Most family businesses have many key performance indicators (KPIs) they use to measure their success, and well-managed companies focus on the critical few KPIs that will present a major issue for the business if they turn down.
Unfortunately, besides their poll numbers and fundraising for future elections, many politicians don’t seem to focus on critical indicators. But one irrefutable negative indicator that they should be watching and start doing something about is the loss of a congressional seat. Our politicians proudly boast that legislation passed in California will be the lead for the rest of the country, but for the first time in 171 years, California’s political voice is getting a little softer as our population actually decreased in 2020.
Most family businesses try to ensure a stable, consistent workplace by treating employees like family, and as a result many choose to stay with that company for their entire careers. At my family business, Holt of California, we ask our employees to complete an exit interview if they leave the company. That allows us to look at overall trends and enables us to make adjustments if there appears to be an area where employee satisfaction lags.
Over the past few years, we have seen an increase in the number of employees leaving for other states. In the past two years alone, we have had 30 employees leave the state. All were hardworking, excellent employees and none are easily replaced. While with employees who are leaving our company but staying in California we can modify compensation, vacation and other benefits to get them to stay or come back, there is little we can do to convince employees who have decided to leave the state to stay. In fact, many employees who left the company but remained in California came back to work for us after discovering the grass is not always greener elsewhere. We have only had one come back from out of state.
Reasons to leave the state vary. Many follow their adult children who moved elsewhere to look for opportunity. But many others leave to improve their own qu
ality of life, citing California’s high cost of living, the homeless crisis and cultural issues. Statistics show that the majority of people moving out are blue-collar families with children who have had enough and see a better future elsewhere. In short, the reason California has always grown is why our population is declining: people see the way to a better life elsewhere.
California’s 1.4 million family businesses employ 7 million Californians. However, the impacts from COVID-19 have created a significant challenge for our members to find enough employees to get the job done. Just look at all the help-wanted banners you see as you drive down the street. It is difficult to find enough new employees to serve our customers and the last thing we need is employees leaving the state for good. Unless corrected, the shrinking workforce that we are seeing will damage California’s ability to continue to maintain that high economic worldwide status we so proudly proclaim as a final measure of our success.
Perhaps our politicians need to develop an exit interview for the productive residents leaving the state and use the information to adjust their policies to encourage people to stay and help family businesses recruit those that left back to the companies and jobs that they once loved.
Shortly after Dee Dee Myers became director of the Governor’s Office of Business and Economic Development (GO-BIZ) late last year, she said she understood the challenges the state’s high costs and strict regulations impose on businesses.
“Continuing to dig into those problems and try to figure out new solutions, creative solutions, is really important,” she told CalMatters in February.
Unfortunately, when it comes to one of the biggest challenges family businesses face in California – the Private Attorneys General Act, or PAGA – it doesn’t appear that state officials want to find those solutions.
Business groups, including the Family Business Association of California, have tried to educate officials about PAGA’s impact. One of our members, who is in the middle of a PAGA shakedown, recently wrote to Ms. Myers to ask for help. There was no response. In fact, the only group that has gotten relief is construction unions, which secured legislation exempting them from PAGA lawsuits.
PAGA allows employees to sue on behalf of the state for almost every Labor Code violation and imposes a $100 fine for the first violation and $200 for each subsequent violation of the same provision – even something as innocuous as listing the corporate name on the pay stub instead of the company the employee works for. PAGA attorneys look for companies with numerous employees because these fines can be assessed for each employee past and present for each pay period and can be combined with class action suits for settlement purposes, so potential penalties quickly add up.
These claims have grown more than tenfold since the law was created, with attorneys’ fees averaging more than $405,000 per case – a main reason why the average settlement in these cases is a staggering $1.2 million, according to a recent study by the California Business and Industrial Alliance (CABIA).
The family business that reached out to GO-BIZ received a letter eight months ago from a law firm on behalf of a former employee, claiming that the company had violated numerous Labor Code requirements, including those covering overtime and lunch periods and rest breaks. This firm has filed over 800 similar claims.
“That’s all untrue and they have no proof,” the owner said. “They throw those accusations at you and expect you to defend yourself and just bury you in paperwork. We’ve already spent well north of $100,000 in attorney fees and that doesn’t include all the staff time to audit all the payroll records and time sheets,” the owner said.
“My attorney said it could take as much as $1 million to fight this. Who has that much to throw at it? I don’t. The bottom line is you either pay that money to the plaintiffs’ lawyers or you pay it to your own attorney. Like we told Dee Dee Myers, there is a huge difference between billion-dollar companies that can build this into their budgets and have a team of attorneys on staff and a company such as ours that simply cannot afford this cost.
“It feels like extortion, but if I cannot afford to pay, then I lose the business.”
Too many elected officials say PAGA is just a cost of doing business in California. But it doesn’t have to be. Let’s repeal it and return all Labor Code enforcement to the state Labor and Workforce Development Agency. That agency has continued to adjudicate many claims since PAGA was enacted, and the CABIA study found that in these cases, violations resulted in workers receiving almost twice as much money and in less time, while employers paid less than half of what they pay in PAGA cases.
Keeping PAGA in place will lead to more situations like this.
“Ironically, in spite of the (state’s) efforts on COVID-19 relief and the attempt to help businesses stay open in California, it is becoming increasingly likely that we will be forced to shutter operations,” the owner wrote. “PAGA is a disastrous law that is meant to help workers but instead buries small employers who really just want to help their communities, their families, their workers and all of the people they serve.”
This commentary originally appeared in the Orange County Register and other publications in the Southern California News Group.
