California’s props and the business impact

by Ben Keller and Clay Moffitt , Fresno Business Journal

California voters once again have a slate of ballot propositions to choose from as they vote in the upcoming Nov. 2 midterm elections.

The Business Journal has analyzed the potential impact of these propositions to the business community, from marijuana legalization to delaying the greenhouse gas law.

Proposition 19

Perhaps the most controversial proposition on the November ballot is over whether to legalize marijuana for recreational use.

Under the terms of Proposition 19, titled the Regulate, Control and Tax Cannabis Initiative of 2010, people age 21 or over would be allowed to smoke the plant and possess up to an ounce of it for strictly personal use. Individual cities would be able to decide how to regulate and tax the substance.

Campaigners for legalization have raised more than $860,000 this year, led by Oakland cannabis entrepreneur and founder of Oaksterdam University Richard Lee.

Aside from studies supporting the harmlessness of the marijuana when compared to drugs such as alcohol, supporters have pointed to a potential $1.4 billion in tax revenue that could be generated with its newly created legitimacy.

Businesses, it seems, have not been so favorable towards the effort, with the California Chamber of Commerce and others questioning how the rights of employers will be affected when drafting drug policies and administering pre-employment drug tests.

According to Brett Sutton, employment attorney for Sutton Hatmaker Law Corp. in Fresno, the language of the proposition is a little troubling for companies in that an employer may only legally cite or fire a worker if their job performance is ‘impaired’ by marijuana usage.

Many employers, he said, may feel they have no choice but to change their rules and take cannabis out of the equation, whether someone is high on the job or merely possessing it. Others may not, he added, which could result in years of litigation just to clarify what is permitted by an employer.

‘A small employer may not be able to withstand that litigation,’ Sutton said. ‘I think larger employers will still do it and somebody will just have to take it to the California Supreme Court.’

Proposition 20

Many believe California is a complex mess of gerrymandered districts drawn in 2001 to ensure the safety of incumbents.

Prop. 20 would create a redistricting commission to draw up the boundaries for the voting districts for the U.S. House of Representatives.

In 2008, Prop. 11 established a California Citizens Redistricting Commission to determine the boundaries and ideally make the districts a better geographic representation.

‘I think it will indirectly benefit small businesses by reducing the gridlock in the legislature and the gerrymandering of the districts on both sides,’ said Al Smith, CEO of the Greater Fresno Area Chamber of Commerce.

There is an idea of a nesting approach, where a group of nearby counties would be clustered into a district and a representative would preside over a number of districts. Smith said he would like to see the districting more closely resemble that theory.

Smith acknowledges it is not a perfect solution and there may not be a way to keep politics completely out of the district boundaries, but he feels it is a ‘vast improvement.’

‘One thing we know is that we can’t keep doing what we’re going,’ Smith said. ‘None of us are benefit and we have to change system.’

Proposition 21

Prop. 21 will establish a vehicle license fee, which will primarily be used to generate funding for the state parks and wildlife programs.

The surcharge is estimated to raise state revenues of $500 million and make $250 million available to the state parks.

Like most tax increases, the Central Valley Tea Party opposes the proposition.

‘We don’t need more money to fund state parks,’ said Jared Gordon, Central Valley Tea Party media coordinator. ‘It’s a matter of prioritizing the funds the state already spends and wastes money on.’

Gordon said these surcharges would raise prices for consumers and decrease demand for products and services.

‘Like all tax increases, if you increase vehicle license fees for businesses, it will impact them with significant reduction in fleet sizes,’ Gordon said. ‘Whenever you increase taxes, you increase prices to consumers that will be passed through to the small businesses.’

Proposition 22

Several mayors from major California cities, including Fresno’s Ashley Swearengin, have expressed frustration toward the state for dipping into their city budgets during times of financial duress.

Prop. 22 would prevent state government from taking or borrowing from the transportation fund or local government projects or services, even during times of financial hardship.

‘It’s based on a fundamental principle that taxpayers are made promises,’ Swearengin said in a press conference in support of Prop 22. ‘That we’re supposed to deliver local services with the dollars they entrust us with and its just absolutely unfortunate that Sacramento has a pattern of taking those dollars to pay for the state budget.’

Jim Taubert, the executive director of the Madera Redevelopment Agency, said the direct impact he sees is on the construction industry. Last year, the state government took $2.5 million from the Madera RDA and this year it was around $500,000.

Madera had a $1 million public works project it had to pull off the table. Also it has a neighborhood improvement project that puts back approximately $1.5 to $2 million annually into the community.

‘Local contractors provide the cement and labor and when the state takes the money away, you can’t do those projects,’ Taubert said.

Not surprisingly, just about every city government in the state is in favor of the proposition.

If passed, it’s estimated it will reduce the state general fund by up to several billion dollars.

Public employees are divided on this issue, with California fire chiefs, police chiefs and libraries in favor and California teachers, firefighters, nurses and taxpayer advocates opposed.

Proposition 23

Backers of Prop. 23 claim that measures in California’s roll back of greenhouse gas emissions to 1990 levels would hit businesses with costly regulations that are infeasible in trying economic times.

The effort to suspend AB 32, the Global Warming Solutions Act signed by Gov. Arnold Schwarzenegger in 2006, is being led by the California Jobs Initiative, a group that estimates 1.5 million jobs lost and a 60% increase in electricity rates due to clean air regulations.

The proposition calls for a delay on all such regulations until the unemployment rate drops down to or below 5.5%.

Among those who share concern about stricter standards from AB 32 are California’s manufacturers, who lost nearly 80,000 jobs in 2009, according to the 2010 Directory of California Manufacturers.

Jan Marie Ennenga, executive director of the Manufacturers Council of the Central Valley, said manufacturers that have already spent hundreds of thousands to millions of dollars on equipment to mitigate ordinary pollutants such as particulate matter and carbon monoxide will be burdened under AB 32 mandates with the task of reducing elusive greenhouse gases like hydroflourocarbons.

‘As it stands, there is no other state that has a cap-and-trade program or has landmark legislation like AB 32, so it puts California manufacturers at a tremendous disadvantage with their competitors in other states as well as in other countries,’ Ennenga said.

A recent Field Poll by the Field Research Corporation indicated 34% of voters in favor of suspending AB 32 while a greater 45% believed the law should forge ahead.

Among that majority are clean energy companies like Mainstream Energy of San Luis Obispo that has added around 500 employees to its subsidiaries, REC Solar and AEE Solar, since AB 32 was signed four years ago.

Director of Government Affairs Ben Higggins, said California’s aggressive approach on clean technology has not only spurred investment in the state, but serves as an example to the cost savings associated with renewable energy such as solar power and biofuel.

‘Our ability to do business here and the business conditions are the sum of many parts,’ Higgins said. ‘Obviously AB 32 is one of those parts we see as being a critical driver ‘ for growth in the coming decade.’

Proposition 24

As the law currently stands, businesses that have operating losses, starting in 2011, can go back up to two years to adjust it to a previous tax base to receive a refund from the state.

Prop. 24 would repeal that practice, and analysts estimate that would generate $1.3 billion in tax revenue by 2012-13.

The carrying back of losses was approved in 2008, but will not go into effect until 2011. So it won’t help small businesses struggling right now, but it could help with the recovery process.

 ‘It will effect many small businesses,’ said Kevin Green, partner at M. Green and Co., LLP CPA. ‘It will have a significant impact on them, especially those that will still be generating losses because of the recession and it could help those small business’ tax situation.’

The other two things this proposition would do is use a three-factor calculation to determine taxes for multi-state businesses and bar businesses from sharing tax credits with related companies.

Opponents also argue that the federal government has implemented this practice for years and the states should be as tax-friendly as the federal government.

Proponents believe allowing these tax breaks would forfeit tax revenue to the state. The California Teachers Association has openly come out in favor of repealing the carrybacks.

Proposition 25

California’s lawmakers were 100 days late in passing a budget this year, a record delinquency in the state where the Legislature has only met the deadline five times in 30 years.

It’s the kind of delay that has prompted teachers unions, health care workers and public employees to support Prop. 25, the ‘Majority Vote for the Legislature to Pass the Budget Act.’

If passed, the current two-thirds requirement to pass a budget would be lowered to 55%, or a simple majority, the same as in 47 other states. Furthermore, legislators would forfeit salary and other payments for each day late after the June 15 deadline.   

The proposition’s backers cite significant cost savings with its passage. In a recent hearing before the Assembly Budget and Senate Budget and Fiscal Review Committees, Legislative Analyst Mac Taylor said $50,000 is incurred in state legislator compensation costs for each day a budget is not sent to the governor past the June 15 deadline.

Others believe the two-thirds vote puts the dominant voting bloc at a disadvantage when a few in the legislature can drag the budget on with negotiations that don’t reflect the public’s interest.

‘It gives enormous power to a small minority of the legislature and we see that minority not really representing a majority position on a lot of views, so you get a budget that doesn’t reflect what Californians actually want,’ said Zack Kaldveer, spokesperson for the Consumer Federation of California.

Opponents of the proposal include the California Taxpayers Association and the California Chamber of Commerce. While Prop. 25 claims not to result in increased taxes, CalChamber President Allan Zaremberg said it would do just that as the majority party would have an easier time getting through their spending plans with appropriations and taxes to accompany them. He added that the proposition is also an underhanded attempt to roll back Prop. 13.

Proposition 26

Prop. 26 is in many ways a counter measure to Prop. 25. Backed by various taxpayer groups and chambers of commerce, Prop. 26 seeks to broaden the definition of taxes to include many payments currently considered to be fees or charges, resulting in a legislative threshold vote of two-thirds in order to approve certain state and local fees.

Those pushing for a ‘yes’ vote suggest that lawmakers have managed for some time to push through burdensome taxes on businesses and individuals by disguising them as fees only needing a simple majority vote. Such fees are meant to target specific industries or groups, such as regulatory fees for heavy polluting manufacturers or for property charges to fix roads and make other improvements.

Cliff Wagner, campaign manager for District 16 State Senate candidate Tim Thiesen, said the problem with many of these fees is that they tend to become very broad and end up charging people for services that should have been paid from the general fund. Prop. 26, he said, would ensure an accurate clarification of what is acceptable as a fee in the Legislature.

‘From the Republican perspective, the difference between a tax and a fee is a distinction without a difference. The effects are the same regardless in many instances,’ Wagner said, ‘And the ruling party in Sacramento has over the past several years made a deliberate effort to shift the cost of providing state functions.’

Wagner added that the even some legitimate fees have become so inordinate in recent years that businesses bearing those costs will naturally pass the expense on to the consumers.

Challenging Prop. 26 are those who side with Taxpayers Against Protecting Polluters, claiming that the measure doesn’t hold industry accountable for their harmful side effects, but instead passes the cost of mitigation on to taxpayers, much like those that fund the cleanup of toxic waste sites or medical studies related to tobacco.

Opponents also say the measure would make it harder to approve fees such as vehicle license fees that fund public needs such as transportation, where tens of billions of dollars are lacking to ensure adequate roads, programs and air quality improvement efforts.  

Proposition 27

Prop. 27 is basically the opposite of Prop. 20. It would dissolve the California Citizens Redistricting Commission and the state legislature would retain the authority to draw the districts.

The California Citizens Redistricting Commission was created in 2008 to reconfigure the districts.

Mike DerManouel, the owner of DerManouel Insurance Group, opposes the proposition because he said the state government has deteriorated the business climate in California because state legislature is not held accountable.

‘Because they don’t have to earn their seats, they are bad at what they do,’ DerManouel said. ‘Without accountability there won’t be changes in behavior in the legislature.’

Proponents of Prop. 27 feel that the redistricting commission would be a frivolous expenditure and send the state even further into debt.  The proponents also argue the commission is comprised of amateurs and believe elected officials would better serve those needs.