The Other Third of California’s Budget

Most people are aware that we spend money on public programs to support various policy goals, but less well known is that we also “spend” a lot of tax money by not collecting it in the first place. Lawmakers and voters can do this by approving exceptions to the state’s (and the nation’s) basic tax structure through what are called “tax expenditures.” The Legislative Analyst’s Office (LAO) estimates that for state fiscal year 2014-15 California would have half again as much General Fund revenue — $55 billion more — if we had no tax expenditures. That’s a big sum of money, and you can bet that if it were program spending, people would scrutinize it with a magnifying glass.

So what do we get from forgoing all this revenue? Do these tax expenditures actually achieve their goals? The truth is, it’s hard to say for sure because we often simply don’t have good data and haven’t done a good job legislating rigorous evaluation and oversight. Tax expenditures vary broadly, ranging from the exemption of most food and candy sales from the sales tax, to the Mortgage Interest Deduction, to tax breaks for businesses, and more. Check out the LAO’s overview of the biggest tax expenditures in California, pros and cons of pushing policy goals through the tax code instead of public programs, and challenges in using them effectively.

— William Chen

Top Things to Know About a State EITC for California

As policymakers grapple with how to ensure economic security for the 5.6 million Californians living in poverty, one option needs to be part of the discussion: a state Earned Income Tax Credit (EITC). A state EITC could give millions of Californians a much-needed economic boost by building on the successful federal EITC, a tax credit that has been instrumental in lifting families out of poverty and helping them make ends meet.

How would a state EITC work in California? And what should policymakers consider when designing one? Last week, we released a report answering these questions. Here are some of the most important things to know about a state EITC:

• To be effective, a state EITC must be refundable. While Californians pay a variety of state and local taxes — and low-income households on average pay a larger share of their income on taxes than do higher-income households — many low-income households do not pay income tax because of its graduated structure. If a tax credit is refundable, then a taxpayer receives the credit even if they do not owe any income tax. This is key if policymakers want a state EITC to reach those who would most benefit from it. A refundable state EITC would reach about one in five California families, while a nonrefundable state EITC would reach less than 0.5 percent of California families.
• A state EITC is typically set as a percentage of the federal credit. Generally, a state EITC is directly based off the federal EITC and will simply “add on” to what the federal credit provides. (For additional detail on how the federal EITC works, see this useful summary.) This means that the main features of a state EITC — who is eligible for a credit and how the size of the credit varies for different types of households — are already established. If California were to pursue this path, one of the most important decisions is at what percentage of the federal EITC to set the California credit. The higher this percentage, the larger the credit to families. For example, a refundable, 15 percent state credit would provide, on average, a $321 tax credit to families in the bottom fifth of the income distribution, while a 30 percent credit would provide an average tax credit worth $638 to these families.
• A state EITC structured as a simple add-on to the federal credit would primarily benefit families with children. Under this model, a larger share of families with children than without children would receive a credit, and the credit would be, on average, substantially larger for families with children. For example, if California had a refundable state EITC that was 15 percent of the federal credit, a little more than one-third of families with at least one child (36 percent) would receive a credit, compared to just 7 percent of households without children (see table). Moreover, the average credit for families with at least one child would be $481, compared to just $61 for childless adults.

As our report outlines, there are plenty of reasons to pass a state EITC. Not only would it give more than 3 million households additional economic support, it would also help rebalance California’s tax system, which currently asks the lowest-income households to pay the largest share of their income in taxes. Further, a state EITC would help strengthen California’s safety net. It’s a smart approach to the crisis of poverty in California. In the coming weeks, additional posts on this blog will look in depth at different aspects of a state EITC.

— Luke Reidenbach

Learning the Right Lessons From the Fight over Tesla’s “Gigafactory”

The announcement that Tesla has selected the state of Nevada over other western states for its new “Gigafactory” will undoubtedly reignite the debate about whether California is unfriendly to businesses. Critics will likely point to policymakers’ inability to secure a California location for the new manufacturing plant as another indicator that tax and regulatory policies drive businesses and jobs out of the state. However, it’s worth taking a step back to look at what lessons can really be learned from this experience, and what policymakers should consider moving forward.

First, site-location decisions are about more than just taxes or regulations. Where businesses locate depends on a multitude of factors, including the availability of skilled workers, shipping and transportation costs, and the quality of public services. This is further borne out by the fact that one region in Texas is reported to have offered Tesla almost $800 million in subsidies and tax breaks and still did not convince Tesla to locate there — and this reported offer far exceeded the $500 million that Tesla requested. While we will learn more specifics in the coming days about the reasons why Tesla chose Nevada, it is unclear that Nevada has the capacity to offer a similar upfront deal, considering that this would represent a substantial share of the state’s total $6.4 billion budget.

Second, California will still see some economic benefit from a Tesla factory located in Nevada. In our open letter to policymakers, signed with stakeholders from other western states, we emphasized that states have an interest in cooperating given that the automotive industry spans across states and cities. As the Sacramento Business Journal reports, a Tesla factory in Reno could help the Sacramento region because warehousing and supplier companies could locate along the Interstate 80 corridor. This speaks to the need for states to be more transparent and cooperative in their approaches to economic development, since Nevada taxpayers may end up paying for a decision that could benefit California anyway.

Finally, it’s worth pointing out that California’s job growth is outpacing the national average, and this includes jobs from companies expanding in or relocating to California. While we have written extensively about how California’s economy remains difficult for many of California’s workers, the state’s high unemployment rate is more about the historic losses incurred during the recession rather than California’s economic growth being comparatively weak. Companies like Mercedes have expanded operations in California, and the state is adding an average number of new jobs each month that is four times what the Tesla plant would have directly provided in total, if the new factory met expectations.

With these things in mind, what should policymakers do? It’s understandably frustrating to engage in a public fight over securing jobs that would benefit a community, only to “lose” that fight. However, policymakers should not learn the wrong lessons from this experience: that California needs lower taxes or needs to offer even costlier deals to individual companies. Research consistently shows that tax cuts at the expense of public investment are not the best means by which to spur job growth. Enhancing public services and investing in a skilled and educated workforce remain the preferred long-term strategies. For instance, with the amount of public subsidies California was considering for Tesla — estimated to be around $500 million – the state could have tripled this year’s increase in General Fund support for the California State University system. It’s this type of investment — and similar ones that create the foundation for future growth — that will promote broad-based economic prosperity in the future.

— Luke Reidenbach

 

 

An Open Letter to Five States’ Officials About Tesla Motors

The announcement earlier this year by Tesla Motors that it planned to establish a major electric-car battery factory in one of five western states has set off a bidding war among officials in these states. Yesterday, CBP Executive Director Chris Hoene joined with leaders at Good Jobs First and peer organizations in the other states to direct an open letter to state officials calling for greater openness in the process, strong accountability measures, and cooperation — not competition — among the states.

August 25, 2014

There is no question that state officials should place a high priority on boosting employment and fostering economic opportunity. But recently our states have been pitted into a race to the bottom from which no real winner may emerge. Tesla Motors’ proposed “Gigafactory” — undoubtedly a valuable source of economic growth for its eventual home state — has been offered to you in an unusual public auction, with the opening bid set at $500 million in subsidies. Since Tesla has chosen to make the process public, we write as unified voices from Arizona, California, Nevada, New Mexico, and Texas to argue that our states have more to gain from cooperation than from competition.

We call upon you to communicate and cooperate across state lines to strike a fiscally responsible deal that is fair to residents and businesses alike. It is time to break the harmful pattern of one state “winning” a high-profile competition, with other states left believing they need to offer even larger tax breaks to win future deals.

Overspending on Tesla — or any other company — could be a net-loss game in which fewer public resources are then available for investments in areas that benefit all employers, such as education and training, efficient infrastructure, and public safety. All state and local taxes combined equal less than 2 percent of a typical company’s cost structure, but lost tax revenue comes 100 percent out of public budgets.

What’s needed are smarter deals, recognizing that all of our states could potentially spend $500 million on other vital public services. Any agreement struck must be fully transparent — no law requires you to negotiate with Tesla or any company behind closed doors — and, furthermore, should include robust provisions for disclosing actual costs and benefits over time. Our states’ residents should feel confident that there are strict performance requirements and money-back guarantees to ensure Tesla delivers what it promises.

Tesla might even be receptive to a multi-state dialogue. The iconoclastic company, internationally known for innovation, could help chart a new path in how economic development is done. The automotive industry — with its far-flung supply chains and 50-state market — is a poster child for the idea that states are interdependent and that the main goal is the long-term growth of American jobs, not any single state’s ribbon-cutting.

We call upon our elected officials to seize this rare opportunity: talk to each other, let the public into the process, and when the time comes, strike a smarter deal that will preserve the tax base for the benefit of all.

Signed,

Diane E. Brown, Arizona PIRG

Chris Hoene, California Budget Project

Bob Fulkerson, Progressive Leadership Alliance of Nevada

Javier Benavidez, Southwest Organizing Project (New Mexico)

Craig McDonald, Texans for Public Justice

Greg LeRoy, Good Jobs First

How Should California Spend Nearly $2 Billion?

The state of California is poised to direct an estimated $1.8 billion over the next four years to new and expanded tax breaks for specific industries and businesses based on actions recently taken by state lawmakers, or actions pending and likely to be approved by state lawmakers in the coming days. These include:

• Nearly $420 million in tax breaks for aerospace companies — specifically targeted to Lockheed Martin and Northrop Grumman — that are competing to build the next generation of stealth bombers, an incentive package approved by the state Legislature and signed into law by Governor Brown earlier this month;
• Expansion of a state tax credit for film and TV production — from $100 million to $400 million annually — that is currently working its way through the Legislature; and
• Efforts to lure Tesla Motors to build a new “gigafactory” in California, which are likely to include tax credits to help meet Tesla’s demands that state and local governments help pay for 10 percent (estimated at $500 million) of the cost of construction. The legislation, expected to emerge in the coming days, is also likely to exempt Tesla from some environmental (CEQA) requirements.

All told, these actions stand to commit the state to nearly $2 billion over the next four years in targeted tax breaks for business and industry.

We think that California would benefit more from investing this money in vital public systems and services. While we don’t question that state leaders should place a high priority on boosting employment and expanding opportunity, we do question whether these new and expanded credits and incentives are the best strategy for meeting those objectives. Consider just a few alternatives for the state’s $2 billion:

• Phasing in a refundable state Earned Income Tax Credit (EITC) to further leverage the federal EITC, which would boost the incomes of working families most in need of assistance, raising thousands Californians out of poverty each year;
• Continuing to restore the 110,000 subsidized child care and preschool slots (nearly one-quarter of the total) cut since 2007-08 that help working parents find and keep jobs and build a foundation for children’s success; and
• Making a down payment on reinvesting in the economic engines that are the state’s higher education systems, for which state General Fund spending per student has declined significantly over the last three decades.

All of these alternatives, among others, are proven winners at helping working families to prosper, while the evidence on targeted tax breaks for businesses is mixed at best.

As state leaders clamor to give away tax credits to high-profile businesses and projects, we should all be asking the question “How should California spend nearly $2 billion?”

— Chris Hoene