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 signs on to letter supporting federal death tax repeal

At a time when more and more progressives are seeking to reinstate higher estate tax levels — and significantly raise taxes for many family business owners — FBA is proud to be one of more than 150 associations and trade groups that are backing legislation to fully repeal the 40 percent estate tax.

On February 20. the Family Business Coalition, of which FBA is a member, sent a letter to Sen. John Thune, R-S.D., and Rep. Jason Smith R-Mo., who have introduced the Death Tax Repeal Act.

The letter points out that repealing the death tax would spur job creation and grow the economy — and is supported by two-thirds of the American people. The letter also notes that the tax is unfair and contributes just a small portion to federal revenues.

“The negative effects of the estate tax make permanent repeal the only solution for family businesses and farms. Your legislation will help America’s family businesses create jobs, expand operations, and grow the economy. We thank you for your leadership on this important issue,” the letter concludes. You can read the entire letter here.

The effort to fully repeal the death tax comes at a time when Democratic presidential hopefuls are calling for huge tax increases on many family business owners. Sen Bernie Sanders, I-Vermont, has called for increasing rates to as much as 77 percent and applying the tax to estates of just $3.5 million, down from more than $11 million in current law. Rates he is proposing haven’t been seen since the 1970s.

Meanwhile, Sen. Elizabeth Warren, D-Mass., has proposed an unprecedented “wealth tax” and Rep. Alexandria Ocasio-Cortez, D-N.Y., has called for raising the top marginal income tax rate to 70 percent.

Many family businesses are relatively cash-poor but have significant land and equipment assets, making it difficult to pay high estate taxes without selling the company.

Economic Forecast 2019: Good, But Not as Good as 2018

By Elliot Eisenberg, Ph.D.

Despite increasing political uncertainty, a split Congress, trade concerns, financial-market volatility, and slowing global growth, from an economic perspective, the next 12 months should be decent. The odds of a recession have roughly doubled but remain relatively low –- about 25% — despite being just a few months away from the longest economic recovery in US history. While growth is slowing in all major economies, inflationary pressures are surprisingly tepid. As a result, the Fed will have the luxury of raising rates at a very leisurely pace, and thus hopefully avoid prematurely ending the continuing, albeit slowing, expansion that we will experience in 2019.

Elliot Eisenberg

A major reason for the slowdown is the fading of fiscal stimulus from tax cuts passed in December 2017 and debt-financed spending increases totaling $400 billion passed in February 2018. Collectively, this should clip GDP by close to half a point. Add to that global slowing, trade concerns, a strengthening dollar, Brexit fears, and other threats — and GDP growth during the next 12 months should average 2.3%, down from 3.0% in 2018.

Despite slowing growth, unemployment will continue declining from the current rate of 3.7% to 3.5% and maybe as low as 3.4%, rates not seen in more than 50 years! As the labor market tightens, wage growth should increase in 2019, from 3%/year last year to 3.3%/year and maybe 3.5%/year by year end 2019, a healthy rise. Inflation, as measured by the PCE, the Fed’s favorite measure, looks to flatline at 2% in 2019, while core inflation (which excludes food and energy) will edge up slightly from 1.9% to 2.1% due to rising wages.

Because of the very slow rise in core inflation, the Federal Reserve will raise the federal funds rate from 2.375%, where it is now, to at most 2.875% by year’s end, with a quarter-point rate increase in June and possibly another one in December. 10-year Treasuries will end 2018 at 3.35%, up from the current 2.8%, and the rate on 30-year mortgages will end 2019 no higher than 5.1%.

As for housing starts, the combination of high land costs, rising worker wages and input costs, and the reduced benefits of homeownership resulting from last year’s tax reform should see them increase by no more than 2% to 1.28 million. Single-family starts will likely total 900,000, up from 883,000, while multifamily starts should flatline at about 380,000.

New and existing home sales should both remain largely unchanged in 2019 and end the year at 620,000 and 5.3 million respectively, with mortgage purchase volume rising by $50 billion due to higher prices. Refinance activity should fall by about $60 billion because of the rise in mortgage rates. Housing inventories will rise slightly, but due to the combination of continued strong household formation and insufficient new home building, home prices will still rise by 4%, less than last year.

In summary, growth in 2019 looks to be slower than what we became accustomed to in 2018. This is attributed to slowing global growth, increasing trade concerns, a growing worker shortage, higher interest rates, and substantially less fiscal stimulus coming from Washington. Although the Fed may raise rates as much as two times next year, strong consumer spending combined with continued employment growth and rising wage growth should keep the economy on track. The chances of a recession, while meaningfully higher than in 2018, remain relatively low.

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.