Last week, the California State Legislature faced a pivotal moment in our legislative process. One thing is clear: California is at a critical juncture.
Our current financial crisis, exacerbated by the policies of our current administration, demands immediate attention. While California boasts the fifth-largest economy globally, ominous signs point to future fiscal instability.
The reality is stark: this year California faced a staggering budget deficit, estimated to be $73 billion. The budget that was passed erased the deficit with a series of creative maneuvers to delay costs and borrow from the future, use rainy day fund reserves, and increase taxes. The deficit is not an isolated incident, but rather a symptom of deeper, long-standing structural issues that will create future budget deficits – unless the Governor and the Legislature face reality on what is driving the deficit.
For years, California’s economy has relied heavily on a narrow tax base, primarily sustained by the top one percent of high-income earners. But recent trends tell a concerning story. Small businesses, the backbone of our economy, are fleeing the state in droves. Between 2022 and 2023, 86,000 small businesses closed shop and left California, taking $20.4 billion in personal and corporate income tax revenue with them.
The exodus isn’t limited to small businesses. High and middle-income earners are also seeking greener pastures. In 2021 alone, we saw a net loss of another $20 billion in taxable income due to outmigration. California lost more residents than any other state in 2022, according to IRS data. More than 700,000 individuals fled California’s high taxes in favor of other states with lower taxes. Those taxpayers took more than $50 billion in adjusted gross income with them. Many of these former Californians chose Texas as their new home.
The Democrat’s solution was to pass an $18 billion tax increase on business. One key provision suspends the use of the “net operating loss” deduction, which undermines fairness in the tax system and discourages job-creating investments within the state. This move not only jeopardizes the fair taxation of businesses, but also poses risks to sectors like technology and transportation, potentially resulting in higher taxes for industries already facing volatility. Additionally, state business tax credits that encourage hiring new workers and investing in research and product development, were also suspended.
Small businesses, which comprise 99.8% of all businesses in the state, are facing strain from California’s burdensome tax policies. Surprisingly, a large number of my Assembly colleagues have limited or no business experience. With anti-business policies crippling our small businesses, and driving the outmigration of businesses to other states, California will continue to have a serious revenue problem.
If we continue to double down on taxation and regulations, the businesses that can leave will leave. Unfortunately, the Balboa Island Ferry in my district cannot pick up and leave. The Ferry is the poster small business that has been subject to new California Air Resources Board regulations, forcing zero-emission regulations on a small business that doesn’t have the financial wherewithal to adapt its three boat fleet.
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In addition to reducing regulations, like those from the Air Board, we must confront crime, homelessness, affordability, and streamline regulations to attract and retain businesses of all sizes so they will invest and grow and create jobs. The path to growing a larger tax base without tax increases begins with a commitment to common-sense solutions to incentivize business investment in California.
Over the last weekend, two small business owners I personally know announced they will be leaving the state for Nevada and Idaho respectively. This is an all too common occurrence and needs to end. Let’s stop killing our job creators!
As we navigate the budgetary process in the coming weeks, I urge my colleagues in the Legislature to prioritize long-term sustainability over short-term fixes. I remain steadfast in my commitment to championing policies that support businesses, large and small. Our state’s economic prosperity depends on it. Let’s fix this!
Diane Dixon represents California’s 72nd Assembly District.
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