This story was reported for the San Diego News Network on March 30, 2010.
They are two former and successful Silicon Valley businesspeople, with similar ideas, competing for the Republican ticket in the California Governor’s seat.
So what makes former eBay CEO Meg Whitman and California Insurance Commissioner Steve Poizner — who appeared in San Diego for a forum Monday — different? The most prevalent difference is their plans on how to fix California’s structural deficit that has created a staggering $20 billion-plus budget gap.
Poizner is proposing a jobs package that would make 10 percent cuts to income, sales and corporate taxes with a 50 percent cut to capital gains tax. He said a broad move like that is what is necessary to fix California’s structural deficit.
Whitman, who called Poizner’s move irresponsible at a March 16 debate, according to the Associated Press, wants to cut all taxes for most businesses to create private-sector jobs.
So whose idea could prove to be most effective for California’s staggering $20 billion-plus deficit? Let’s hear from some local experts.
Erik Bruvold, founding president of the National University System Institute for Policy Research:
At the heart of both Whitman and Poizner’s thinking about California, economic development, and taxation is the argument that the state’s fiscal structure makes the state uncompetitive. Faced with high taxes, the thinking goes, businesses skew investments toward other states which provide a better return for a tax dollar.
There is much to commend this thinking. It is clear that some businesses “vote with their feet”, fleeing uncompetitive markets for those that have a better sense of how to balance tax liabilities with public services.
But one should be cautious that capital (and jobs) are so mobile or that benefits of a tax cut would immediately be felt. Businesses develop deep roots (both here in California and in other states). Valued employees buy houses, start families, and join the PTA. Corporate relocation imposes high transaction costs and are rarely done just to realize a few dollars savings on taxes. Thus any cut, whether Meg Whitman’s targeted approach or Poizner’s across the board reduction, is unlikely to create a booming economy within a year. While such policies would yield positives, full accounting of these benefits would take decades to be fully realized.
Perhaps demonstrating the disconnect between the logic of politics and the logic of business it should be pointed out that neither Whitman or Poizner as CEOs operated in a way that focused on the short-term savings marginal changes in the tax rate would yield to their business. eBay suffered California taxes for years without deciding to flee for a place like Alabama, where the tax burden is significantly lower. Poizner’s SnapTrack both was built (and then sold) in California and the commissioner continued to live in state even though he was subject to high capital gains taxes after the sale went through. They knew then (even if the campaign trail has caused some memory loss) that decisions about where to locate a company and where to invest capital are the result of a myriad of variables — of which state tax rates are only one among many.
Randy Ataide, executive director of Fermanian Business and Economic Institute at Point Loma Nazarene University:
My view is that what is most lacking in California is a coherent, strong and reasoned approach to leadership. We are a very complex state with many competing interests, and no single culprit to blame for the fiscal crisis we are presently in. While Poizner’s slashing of income, sales and corporate taxes touches a considerable populist nerve, it seems highly problematic in light of the massive budget deficit. It makes a huge gamble on “supply side” economic theory stimulating the economy quickly enough to offset the revenue loss. I am not convinced that there is enough confidence and capital available in the markets to support Poizner’s plan.
Whitman’s approach is targeted tax cuts which sounds similar to business taxation policies in states such as Idaho, Texas and Indiana. These have been fairly effective in creating a more business-friendly climate. What is needed is more clarity and specificity from Whitman–what industries and for what length of time would the cuts be proposed?
Thus, the differences between the two candidates are fairly stark. However, both candidates need to bring a comprehensive vision of creating substantive and systemic change to government policies, mechanisms and enforcement to create a friendlier business, entrepreneurial and venture capital climate. Tax policy is an important part of this process but not the sole one.
Ruben Barrales, CEO of the San Diego Regional Chamber of Commerce:
Both Whitman and Poizner are on the right track in proposing tax reductions to help revitalize California’s economy and encourage private sector job growth.
Poizner has an intriguing proposal to provide an overall tax cut of 10 percent for personal income, sales and corporate taxes, and to reduce capital gains taxes by 50 percent. This is a supply-side approach that has merit, and, if implemented, would reduce the tax burden on California’s taxpayers.
Whitman’s targeted tax cuts for manufacturers and start ups would provide incentives for businesses to hire additional workers. This would help two industry sectors that are important employers in the San Diego region. Additionally, her call for a moratorium on new regulations and a focus on reducing state spending appeals to many small business owners.
Ron King, political science professor at San Diego State University:
1. Everything else held equal, lower business taxes can sometimes have a partial effect on economic productivity. But, the effect matters on the type of tax cut and as always, everything is not held equal and under best conditions, the effect is small.
a. The type of tax cut — in general, simple business tax cuts do less for growth than targeted cuts to investment. The logic is easy to understand. A broad business tax reduction merely increases net profits on past transactions. There is no obligation for the firm to reinvest those greater net profits, as opposed to giving them in dividends or spending them on nicer corporate offices. A tax cut that is linked explicitly to new investment in productive plant and equipment has a higher impact. The difference is between “throwing money” at business versus targeting the money to business investment in the public good. Of course, business interests always prefer the former.
b. Everything is not always held equal: tax rates are only one small part of any business decision to invest. There are far more factors, and many of these are far more important. The empirical literature is clear about this. So, for example, a tax cut for investment when there is no available new technology or more trained workers to employ will have virtually no effect. Also, the inventory stock matters, competitors matter, available interest rates matter, etc.
c. Put technically, the quantity of capital is only a small part of any economic growth alteration. And tax cuts have only minor impacts on the quantity of capital. Tax rate cuts make business happy but we get probably far more bang-for-the-buck in productivity by increasing in new technologies or training the workforce.
2. Will any of this have an effect on budget deficits? Of course not, if we are thinking in the short or medium run. The evidence is overwhelming. Tax cuts in the short- and medium-run increase the government’s deficit. For the federal government, this means higher borrowing and higher interest rates, which negatively affects business investment. For state governments where budgets must be balanced, the only way to pay for business tax cuts is spending reduction. Any possible growth effect from tax cuts occurs over many years, affected by many intervening causal factors. That’s obvious, think about how long it takes to establish/expand a business or to have new vintage capital technologies come on line.
Thus, when one looks at the Presidents (nationally) who have hugely expanded the national debt, it has been Reagan and G.W. Bush, both of whom promised supply-side growth resulting from massive tax cuts. And both were wrong.
3. There is a strong possibility that tax cuts will have a “race to the bottom” effect. State A cuts taxes to attract business, so neighboring State B does likewise, so State A again cuts taxes, and B responds… The result is that structural deficits climb yet there is no net change to any business promotion effect.
4. The main problem, however, is political rather than economic. Politicians during budget crises will do anything to escape making hard decisions (raising taxes or cutting services). The cheap and easy response is to promise that, if one does quick-and-painless fix Q, all will be well. And tax cuts are beyond ‘painless’ — they are enjoyable to receive. So the fifth-rate politician promises that something enjoyable to receive will solve all problems, so that no painful decisions need be made. And since the impact is multi-causal and long-term, there is no accountability for the actual result.
The bottom line is this: anyone who promises that we can give money to business as a way of solving the current budget deficit is selling snake oil. Think the problem through — and then run away !!! Quickly.
Hoa Quach is the political editor for the San Diego News Network.