Published December 2003

Healthy California economy good for us, too

During the energy crisis in California a couple of years ago, there was an outcry among some Washingtonians that the electricity we generate from our dams up here wasn’t going to be sent to California grids if it meant our local rates would go up as a result. “It’s our power, not theirs” was the sentiment.

That line of reasoning was quickly squelched and put into perspective by a local economist who reminded complaining Washingtonians that “there are 35 million customers in California for Washington businesses to sell things to. I think you probably want them to at least be able to turn on their lights and computers so they order what you’re selling.”

It’s very important to our local economy that California finds its way to economic prosperity. With the recall behind our brothers and sisters to the south, it’s time to roll up the sleeves and focus on solutions. Let’s hope they do.

On the surface, it seems we might benefit from malaise in California as business and investors leave the Sunshine State for greener pastures that might offer, for example, no state income tax. But too much trade between our state and California is negatively affected by economic problems in California to make that tradeoff worth it. We’re far better off with a healthy California economy, itself one of the 10 largest economies in the world if it were its own country.

For starters, there are the 35 million potential “customers” there against our roughly 5 million in Washington. We here in Washington, therefore, tend to rise with the economic tide in California.

Real estate in our region depends on job growth and business expansion, so it’s worth a little ink to talk about what the solution in California might be on the assumption that turn-around there would generate jobs here as local businesses trade goods and services with Californians and expand.

It’s also interesting to consider that change in California — if it works — might have broad political impacts even here in Washington as other states look to what could be either a governmental model of success or failure in how you fix deficits.

The rather well known Arthur Laffer, founder and chairman of Laffer and Associates and author of the “Laffer Curve,” says the solution is going to a flat tax. Laffer argues that the progressive tax structure in California is one of the primary reasons that business and higher-income individuals have been leaving California. It’s a structural problem, not just a leadership problem, he contends. “The gubernatorial recall vote was in reality a revolt against the current progressive tax environment.”

His solution is to restructure the existing progressive tax system and go to a flat tax or a derivative of it.

“You can’t expect politicians to set aside and then not spend a rainy-day fund. ... And for sure they won’t pass on billions of unspent dollars onto their term-limited successors. It just isn’t going to happen,” says Laffer.

The best form of spending control, he says, is the simplest form of spending control: don’t give government the extra money during good times and don’t shortchange essential programs during tough times.

“The case for the flat tax is nowhere more compelling than it is in California,” he contends.

The details under Laffer’s flat-tax plan are worth a read. Taxpayers would still see a deduction for home mortgage interest expense, charitable contributions and rent on your own primary residence. Business and individual taxes would be based on a flat rate tied to business net sales (total sales less purchases from other companies — to avoid a double-taxation) and total income minus the above-mentioned deductions for individuals. Gone are sales tax, excise tax, state payroll tax, state income tax, etc. “Gone, gone, gone,” as Laffer puts it.

The outcome would be milder fluctuations in tax revenues when compared to the current progressive tax system that rolls in the dough during good times and crashes hard (as is the current situation in California) in bad times. Given that there was enough energy in California to force a gubernatorial recall mid-term, it’s entirely possible that something as dramatic as a flat tax (or a derivative) might get legs in Sacramento.

Whatever the outcome, it’s important that California’s economy rebounds and its state government gets into the black again. It’s important for Californians and it’s maybe just as important to Washingtonians.

When you connect the dots from business expansion and job growth locally to how California contributes to it, the case for a healthy California economy is abundantly clear.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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