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

California lawmakers must protect family businesses in 2021

This op-ed appeared on the California Globe website

These days, it is hard to avoid headlines about the latest businesses going under and more lost jobs due to COVID-19 in California. But not only are California’s businesses suffering like most across the country, we have it even worse for one reason: lawmakers did virtually nothing last session to protect our businesses against California’s worsening lawsuit abuse problem. With everyone back in Sacramento, my hope is that issue will seriously be considered this year.

Let’s start with California lawmakers’ failure to curb the oncoming wave of COVID-19-related frivolous lawsuit, while in fact creating more ways in which businesses can be sued. Did you know that businesses must actually prove they did not give a customer or employee COVID-19 instead of plaintiffs providing any evidence of their own? They are required to spend precious resources on discovering who may have gotten sick and where, even if they were following all appropriate public health guidelines. If this seems backwards, it is. And it’s the perfect storm for lawyers looking to turn a buck via lawsuit settlements – a recipe for disaster for our state’s struggling family business owners. And this is only one of the ways that our lawmakers let our business community down during this past session.

Then there is the issue of California’s notorious Private Attorneys General Act (PAGA), which allows any “aggrieved employee” to sue on behalf of the state for the most trivial “violations” imaginable, such as a typo in an employee’s paystub or a clerical error on a timesheet. Why are these utterly useless lawsuits continuously filed in the Golden State? Because under PAGA, there is the potential for a huge payout, which – as usual – attracts the state’s aggressive trial attorneys.

Under PAGA, 75 percent of penalties paid by non-compliant employers goes to the state. Therefore, the employees who bring the suit are left with 25 percent, a third or more of which goes to the lawyers. In the most classic example of why this needs to be changed, a 2019 PAGA lawsuit against Uber resulted in a $7.75 million settlement – $2.3 million of which went to the plaintiff’s counsel. This left a little over $1 to the average Uber driver.

In addition, the threat of PAGA lawsuits prevents employers from working with their employee’s need. As an example, Jim comes to work at 6:00am, so is required by state law to have lunch at 11:00am. All of Jim’s friends at the business have their lunch at noon, so Jim would like to put his lunch off an hour so he can join them. The employer must say no, the law won’t allow that and you could sue me if I OK it. Another example, Sue would like to skip her afternoon break so she can be there for the start of her son’s little league game. Again, the employer must say no, for the same reasons.

It’s senseless laws like this like this that allow trial attorneys to reap the benefits of our broken legal system, while leaving our businesses owners to suffer the consequences. As the Executive Director of the Family Business Association of California, I know that our lawsuit abuse problem is hurting struggling, family-owned businesses. If we want to ensure we actually have an economy to come back to once this crisis is over, lawmakers must prioritize protecting, rather than harming, the employers in this state, and ending these unwarranted lawsuits.

FBA’s Public Policy goals for 2021

The following is FBA’s Public Policy Goals for 2021, as approved by the Association’s Board of Directors.

State tax issues – FBA needs to remain diligent in the debate to maintain fair and equitable business and personal taxes in California:

  • Continue our leadership role to maintain prohibition on Estate Tax in California.
  • Continue to oppose efforts to enact a sales tax on business services.
  • Be wary of all proposals to increase taxes.

Sponsored bills - move our two sponsored bills in the Legislature, one to put a definition of a family business into state law and the other to protect the ability to deduct business taxes paid in other states.

Regulatory and lawsuit relief continues to be a top priority for FBA members but regulations surrounding labor relations and human resource management provide additional challenges to our members. FBA will focus on opposing legislation and regulations that impact labor and our workforce and support relief from PAGA lawsuits against family businesses. Also, continue work to broaden AB 5 of 2019 to exempt more types of contractors who should not be employees and soften the blow from this onerous legislation.

Workforce development - identifying a qualified and available source of labor is an increasing challenge. FBA will work to support workforce development opportunities that help provide a trained workforce.

Publicize FBA policy, legislative and regulatory positions.

  • FBA will work to achieve coverage of our positions and opinions in the news media.

Continue to explore opportunities to assist the transfer of ownership and property between family members and through successive generations and oppose efforts to make that more difficult.

Continue to build relationships with key legislators, new legislators and new administration officials and:

  • Produce the 9th Annual Family Business Day and Legislative Conference.
  • Meet one-on-one with key legislators, new legislators, and officials in the Governor’s Office to educate them on the importance of family businesses and the issues that are critical to family businesses.
  • Encourage FBA members to call on their legislators and engage employees in both education and advocacy to illustrate the impacts state government has on family businesses and their employees.
  • Participate in coalitions, public events, and hearings advancing the importance of the family business model and family business issues.

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.

FBA takes positions on four November ballot measures

FBA has taken positions on four ballot initiatives that will have an impact on family businesses.

  • No on Prop 15 — an $11-12 billion tax increase at the worst possible time. Public employee unions always want more money. The property tax on property owned 10 years or more could double or triple if Prop 15 passes.
  • No on Prop 19 — the California Association of Realtors want to see more people sell their homes and accomplish this with a $1-2 billion tax on parents transferring homes to their children.
  • No on Prop 21 — rent control is just bad public policy, period!
  • Yes on Prop 22 — FBA views any change to AB 5 as positive and many of our members use app- based delivery services. People should be free to decide if they want to be employees or contractors, not have the state decide for them.

If you would like more information on any of the 12 initiatives on the November ballot contact Robert Rivinius.

FBA ‘Disappointed’ Newsom Backs Proposition 15

Contact: Robert Rivinius, Executive Director

robert@myfba.org, 916-847-2700

The Family Business Association of California today issued the following statement expressing disappointment in Gov. Gavin Newsom’s decision to support Proposition 15, the measure on the November ballot that would create an $11.5 billion tax increase on businesses.

“The Family Business Association is composed of family-owned businesses that have been investing in California for decades. Our members have a long-term view. We create jobs and opportunities for thousands of Californians. COVID-19 has hit us hard. Global, offshore competition has narrowed our margins. Asking us to now pay in many cases two or three times the amount in property taxes that we have historically paid means higher wages will be deferred and what limited job growth there is will stop and any new jobs likely will be created in other states. Proposition 15 is a terrible idea, especially during these difficult times. We are very disappointed by Governor Newsom’s endorsement of this proposition that will seriously harm our businesses and our employees’ job security.”