Lawmakers in California are at it again. A few months ago, after President Trump signed the Republican tax cut and reform bill into law, there was a flurry of tax hike legislation out of Sacramento, most of it aimed at businesses.
While taxes levy a direct claim on a company’s bottom line, other laws and regulations can push a firm into the red.
A little more than a decade ago, a more moderate California legislature commissioned a study on state regulatory compliance costs on small businesses. The answer came back: $134,122.48 per small business in 2007 alone.
Today, there are still about 750,000 businesses in California. For some lawmakers, that's merely a sign that the regulatory burden isn’t yet too high.
California state Sen. Hannah-Beth Jackson, D-Santa Barbara, introduced Senate Bill 1284 earlier this year. Her measure would require all California firms with 100 or more employees to submit a report to the state every year that details the gender, race, and ethnicity of all employees. Further, the bill requires these firms to detail ten different job categories, from executives to service workers, how much those workers were paid, and hours worked, with the totals broken down by site and then consolidated for the whole firm.
“It’s important that women are paid equally,” Jackson has said, noting that she expects that the law would be “a way for companies to self-evaluate and to self-correct.”
Of course, for companies that don’t “self-correct,” there’s always the force of government to urge them along. Noncompliant firms would be subject to a $500 fine.
Further, companies that do file the information will be liable under California’s Equal Pay Act, signed into law in 2015 by Gov. Jerry Brown. This law requires equal pay for employees performing “substantially similar work” with employees able to file administrative claims with the state as well as sue their employers or former employers for up to three years after they leave work. If employees can show they were paid less than others’ doing the same work, they can recover the difference in wages, interest, and an equal amount in damages, plus attorney’s fees and costs.
The practical effect of these two laws operating in tandem would be to offer full employment for California’s attorneys. Jackson practiced law for 20 years.
As of 2015, the U.S. Census Bureau estimated that there were 19,182 firms in California with 100 or more employees at 166,076 locations employing a total of 9,323,398 people. Most payroll systems don’t gather information on government-categorized positions, race, ethnicity, or gender. As a result, should the bill become law, compliance costs may reach $1 billion or more — about $100 per employee to comply with government rules that don’t add to productivity.
Of the proposed law, California-based recording artist and producer Dairenn Lombard observed, “If the state is going to require this of employers, then also require employees to show how many years they have in their field, how long they've worked for the company, how many days off they took or left early, and their performance evaluation reports.” Experts who study wage patterns have found that these factors weigh heavily on what businesses decide to pay their employees.
According to the U.S. Census Bureau, California has had the nation’s highest Supplemental Poverty rate since 2009, the year the census unveiled this more comprehensive measure of poverty that, unlike the Official Poverty Measure, accounts for regional cost-of-living differences. In the most recent year reported, 20.4 percent of Californians lived in poverty, proportionately 39 percent higher than in Texas, a similarly large and diverse state.
A big contributor to California’s nation-leading poverty rate is its high cost of living, led by very high housing costs. While location contributes some to this high cost of living, much of it is driven by government policies: high taxes, a heavy and capricious regulatory burden, restrictive zoning, and environmental laws easily exploited by labor unions to extract wage concessions from developers.
Were Jackson’s bill to be signed into law by Gov. Jerry Brown, its effects are easy to anticipate: increased pressure on businesses to reduce operations in California and move employees to more friendly climes, such as Texas.
But one industry is likely to shrug off the new law: Hollywood. Hollywood accountants and tax attorneys, well-known for their creative finance acumen, will simply sidestep the law by creating hundreds of limited liability corporations with 99 or fewer employees while figuring out how to continue to pull down more than $300 million in California tax incentives. Some of that, of course, will be reinvested back into the political campaigns of those who run the California government.
But this is an irony more easily perceived the farther one gets from the Golden State.
This commentary was originally featured in the Washington Examiner on May 1, 2018.