Orange County Register, January 31, 2003

There's a new reality TV show that gives contestants radical makeovers plastic surgery, hair, makeup, wardrobe. In similar style, California Governor Gray Davis has been made over as a friend of small business. He is not.

In his recent State of the State address, the governor vowed to do "everything in our power to support small businesses." The centerpiece of his plan calls for the appointment of the first-ever small business advocate in the governor's office, Sonya Blake.

According to Mr. Davis, she will be responsible for "rejecting all regulations that unfairly impact small business." She will also review "existing regulations and identify changes that promote growth and new jobs." But actually, Ms. Blake won't be able to reject anything.

She'll be another bureaucratic figurehead offering suggestions that are unlikely to diverge from those of her boss. A look at Davis's track record over the past four years reveals a decided bias against California's 2.5 million small businesses, and his new plan offers little hope for change. Mr. Davis changed overtime rules from weekly hours (more than 40) to daily hours (more than eight), which destroyed flexible work schedules, comp time, and four-day workweeks. Workforce flexibility is particularly important to small businesses where employees must juggle responsibilities and work irregular hours to finish projects on time.

Mr. Davis also forced businesses to provide paid family leave. This requirement hit small firms hardest because they have fewer workers that can be shuffled around to fill vacancies.

This brings up an important effect of virtually all government regulations: Large firms often gain a competitive advantage over small firms from new regulations.

Regulatory compliance usually involves high initial fixed costs: a new database, a new environmental filter, a reconfigured restroom in the case of the Americans With Disabilities Act. Large firms can distribute these fixed costs over many units of output, so the per-unit impact on price is negligible.

Small firms can't, so they lose customers to larger competitors who can offer lower relative prices. Regulations disproportionately harm small businesses. The same is true of Mr. Davis's new tax proposals.

Governor Davis wants to raise the sales tax one cent per dollar, costing the typical family about $250 a year. He also wants to increase the personal income tax rate on the top earners, many of whom are small-business owners, from 9.3 percent to 11 percent. Californians are already some of the most heavily taxed people in the nation. California has the second-highest top income tax rate, the eighth-highest maximum sales tax rate, and the ninth-heaviest total tax burden.

Small businesses tend to be specialty stores and boutique shops, offering higher-quality products at premium prices. Sales-tax rate increases raise the price of high-end products typically sold by small shops more than low-end products sold by mass retailers. After the sales tax hike, people will still buy a new toaster, but they'll buy the Wal-Mart toaster, not the designer toaster. Customers will be driven away from small firms to the big retail chains. Lest anyone still think Gray Davis is a friend of small business, consider this final fact.

Through analysis based on the California State Tax Analysis Modeling Program, the Pacific Research Institute estimates that the Davis sales and income tax increases will destroy 590,000 California jobs over three years. The majority of these lost jobs will be in small companies.

All the makeup in Hollywood can't disguise the reality that Mr. Davis's plan offers no hope. It will kill jobs, make California less competitive, prolong the slump, and continue to tilt the playing field against small firms.

On Davis's watch, California went from the tenth worst policy environment for small business to the fifth worst. We're moving in the wrong direction. Businessmen are beginning to redline the entire state. Only low-tax, pro-growth policies will create an entrepreneurial climate producing new businesses, large and small, and jobs for all who want to work.

Dr. Lawrence J. McQuillan, coauthor of California by the Numbers: Assessing the Governor's 2003 State of the State Address and Budget, is director of the Center for Entrepreneurship at the California-based Pacific Research Institute. Contact the author at lmcquillan@pacificresearch.org.