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CALIFORNIA PORTFOLIO

With a Friend Like President Clinton, California Doesn't Need an Enemy

June 27, 1993|JOEL KOTKIN and DAVID FRIEDMAN | Joel Kotkin, a contributing editor to Opinion, is a senior fellow at the Center for the New West and business-trends analyst for Fox News. David Friedman, an L.A. attorney, is a visiting fellow at the MIT Japan program.

Six months after California overwhelmingly rejected George Bush's anti-California policies, his successor seems inclined to let the state's economy suffer some more. Nearly all the pro-California provisions in Bill Clinton's original budget plan ended up in the round file, with hardly a peep of protest from the President.

Indeed, the emerging federal budget is hostile to California on virtually every front. For example, by maintaining crop and commodity subsidies and by replacing a BTU energy levy with a gasoline tax, the plan penalizes urban manufacturing regions like California. More troubling, it severely handicaps start-up, entrepreneurial and smaller-scale companies crucial to a California recovery, while treating larger, declining corporations with comparative ease.

All this only serves to magnify the effects of existing tax discrimination against the state. Since the mid-1980s, California has paid close to 10% more than its fair share of the country's federal taxes, in effect, subsidizing the rest of the country to the tune of more than $10 billion a year. In addition, the state Department of Finance conservatively estimates that at least 20% of all proposed federal spending cuts in Clinton's five-year plan (including defense reductions), and well over 16% of the proposed new taxes, will be born by California residents, who comprise just 12% of the country's population.

This will add at least $3 billion annually to the state's already disproportionate federal tax burden, stripping more than 54,000 jobs a year from California's economy. Although this partly reflects the greater proportion of high-income people living in the state, the tax bill makes no distinction between the cost of living here and, say, in Arkansas.

Clinton, to be sure, professes to "love" California. But it's a love mostly expressed in public-relations gimmicks--a jog with L.A.'s Mayor-elect Richard Riordan, and hastily arranged visits from Commerce Secretary Ronald H. Brown and Vice President Al Gore. Meanwhile, such states as Oklahoma and Louisiana suffer little for their anti-Clinton attitudes. Remember, it was chiefly Sens. David L. Boren (D-Okla.) and John B. Breaux (D-La.) who killed the BTU tax, a levy favorable to California in per capita terms. The Senate's new gas tax would more severely harm urban commuters and truckers in two states that supported Clinton--New York and California.

Similarly, the Administration seems to have no will to soften the staggeringly anti-California bias in its defense drawdown policy. Although California accounts for roughly 22% of federal defense expenditures, the current five-year plan would force the state to bear anywhere from 30% to 40% of the proposed cuts, costing the state, at minimum, more than $11 billion in spending and 203,000 jobs beyond its fair share.

But perhaps the most insidious feature of the emerging tax legislation is its frontal assault on the entrepreneurial economy essential for California's recovery. Clinton's campaign vow to lower capital-gains taxes for smaller companies shares the fate of many of his promises--abandonment under pressure. Even worse, he has said little about a 10% tax surcharge on capital gains for taxpayers who make more than $200,000 a year.

This is important to California, because the state is home to the largest concentration of fast-growing companies in the country. Even in the disastrous year of 1992, it attracted 35% of all venture-capital investments nationwide. Since Californians play such a major role in venture-capital formation, the state's residents would pay a whopping 44% of the capital gains affected by the new surtax, costing the state's economy at least $300 million a year.

"People don't realize that the vast majority of venture-capital investors are doctors, lawyers and retired CEO's," says Bill Younger, president of the Western Assn. of Venture Capitalists. "This (tax bill) will dampen the investment in younger companies and the jobs that go with them."

Californians might do well to consider what life would be like under Clintonomics. No spin doctor can obscure the fact that deficit reduction is falling especially hard on them. With a largely ineffective congressional delegation, Californians may be unable to work themselves out of recession until they elect a President less willing to abandon their interests under political pressure.

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