Wednesday, November 10, 2010

Dear Governor Brown, 3 Fixes for Small Business

Jan Norman of the Orange County Register and I were talking yesterday. She asked me a question that spurred a blog post idea..."if you were asked by Governor elect, Jerry Brown, how to keep small business in California, how would you respond?" Well, Jan, I am glad that you asked. I provide Location Advice to owners and occupants of industrial buildings in Southern California. In order to respond to the question of keeping business in California, I reflected upon the reasons why businesses are leaving California. I considered; labor, utilities, real estate occupancy costs, agency regulations, logistics, taxes, environmental mandates, and quality of life. What follows are three ideas that I believe would persuade businesses to stay in California. Increase property taxes, decrease state income taxes, reduce the state tax upon a sale of real property or a business.
Increase Property Taxes:
I can hear the collective scream from my fellow CRE brethren and property owners around SoCal...Nooooo!!!. Here is my contrarian view. Businesses aren't leaving California because property taxes are lower in other states...in most states, property taxes are actually higher...Texas and Colorado as examples. Here is my idea. Raise taxes on commercial property in California (leave residential rates the same) and give the cities more discretion on how to apportion the taxes. In this model, cities can actually compete for businesses by providing property tax rebates much the same way our neighboring states do. Granted, the increased property taxes may cause real estate to become more expensive to occupants as the owners pass this cost along to their tenants. My theory is that owners will only be able to achieve market rents...whatever they are. Higher operating costs for owners, thus lower net income will cause a depreciation of property values which will lower the basis from which property taxes are based. If cities have more discretion on how property taxes are collected and spent, I believe that cities will apportion the revenues to the betterment of the cities...much the same way that redevelopment districts apportion incremental tax revenues.
Decrease State Income Taxes:
Owners, occupants, employees, etc. pay extraordinary taxes upon the income that they earn. Bordering states that charge no state income taxes...Washington, Nevada, Texas have an advantage. Let's consider a reduction by half of all state income taxes. If owners and occupants pay a smaller percentage to the state, the attraction of California is greater.
Reduce the State Tax upon the Sale of a Business or Real Property:
Companies, especially those closely held, with aging owners are considering a move out of state because when the business is sold, the proceeds from the sale of the business are greater. If we implement a program whereby a sale of a business asset carries a smaller tax burden, more companies will keep their operations in California.
Three simple ideas with predictable results!