Guest Contributor
Anthony P. Archie

Anthony P. Archie is a public policy fellow in Business and Economic Studies. Prior to joining Pacific Research Institute, Anthony earned his masters degree in public policy from Pepperdine University, specializing in economics and regional/local policy. As part of his graduate work, he co-authored Crisis in California: Reforming Workers’ Compensation, a proposal that drew praise from an esteemed panel of scholars and policy advisors. Mr. Archie has held internships on Capitol Hill and in the State Assembly. He received his B.A. in economics and political science from Pepperdine University.

Newsom “K”-Os Governor’s Plan
Governance by proposition..
[Anthony P. Archie] 10/15/04

In recent years, California has not been a state friendly to business. The current administration has set out to change that, seeking to jump-start economic activity by unburdening businesses from heavy taxes and regulations. Major cities, however, have yet to get the message. Consider, for example, San Francisco.

In his first year in office, San Francisco mayor Gavin Newsom had to tackle a $300 million budget shortfall with an economy that has remained stagnant at best. Although he was forced to make necessary cuts and to re-negotiate labor contracts, Newsom chose to go after businesses to fill in the city’s fiscal gap. He did so, in Schwarzenegger-like fashion, by taking it to the people in the form of propositions, the most notable of which is Proposition K on the November 2 ballot.

Proposition K would impose a .1 percent tax on businesses that take in more than $500,000 a year in gross receipts, a rather inclusive figure. This new tax would be in addition to San Francisco’s hefty 1.5 percent payroll tax, one of the highest in the nation. If passed, $17 million is expected for the current fiscal year with $30 million generated annually for the next four years.

Unlike Schwarzenegger, Newsom has not garnered widespread support for his initiative, and polls show that the proposition is likely to fail. This is distressing to the mayor because the city’s $5 billion budget was approved with revenue from Proposition K already included. In a last-ditch effort, Newsom is trying to make the proposition look more attractive by promising only to enforce the tax on bigger businesses. Instead of this dubious strategy, the mayor should pull a page from the governor’s playbook.

When Governor Schwarzenegger was elected last October, he faced an estimated $35 billion deficit and a business climate under assault from heavy taxes, onerous regulation, and the crisis in workers’ compensation. The governor brokered a deal on workers’ compensation and convinced voters to pass a massive bond measure to shore up fiscal woes. More important, he reassured the business community that he would not raise taxes and pledged to veto any “silly” bills that would be a detriment to the economy. Judging by his recent string of business friendly vetoes, the governor solidified his position and a majority of Californians approve of how he has handled the economy.

What Mayor Newsom fails to understand is that ballot propositions, even if approved, often fail to deliver promised revenue. Worse, taxing businesses impairs California’s ability to recover from its economic slump. According to the California Taxpayers Association, California has the second-worst business tax climate in the country, making it difficult to attract new employers into the state. The governor realizes this. In his state of the state address he declared, “The people of California did not elect me to destroy jobs and businesses by raising taxes.” A tax increase, he said, would be “a final nail in California’s financial coffin.”

If California’s prosperity is to be restored through a more friendly business climate, the state’s major cities will have to be on board. That means cities should free businesses from burdensome taxes instead of imposing new taxes. Whatever its fate at the hands of voters, Proposition K shows that the mayor of San Francisco could learn something from the state’s governor. CRO

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