The words "California" and "technology innovation" often occur in the same sentence -- a happy reality that makes the Golden State shine. With only eight days left in the year, it's worth looking back and evaluating how the state's tech policy could improve.

Overall, 2005 was a good year -- unemployment rates are low and Silicon Valley has started buzzing again. But while entrepreneurs were getting back on track, the state's lawmakers were busy with other tasks that were not so helpful. The push for a government-controlled Internet is a prime example.

It's ironic that in the same year that the federal government opposed foreign meddling with the Internet at a United Nations meeting, local governments around the country, particularly San Francisco, lurched in a different direction. Government control of the Internet at any level is something to be avoided, and San Francisco Mayor Gavin Newsom's support for socialized communications infrastructure was disappointing.

Staying Flexible
California's fiscal well-being depends a great deal on businesses having the flexibility to operate in a competitive market free of government interference, but when the public purse competes with local cafes offering free Internet access, everything goes off kilter. Another big mistake was pandering to rent-a-mob activists during the recent telecommunications mergers.

The mergers of SBC/AT&T and Verizon/MCI were good for consumers as they add two strong new competitors to the communications landscape. Providers that distribute Internet services over cable, wireless , satellite, and broadband over powerlines now have serious competition from the DSL market. But getting those mergers to completion wasn't easy and resulted in a deal where the Public Utilities Commission (PUC) basically forced the telcos to buy off sham "consumer" groups to the tune of US$67 million dollars.

That money could have been used for investment, and its misplacement will likely be borne by consumers in the form of higher prices and slower innovation. At least the PUC's actions weren't a direct ban on technology like the attempted legislation from Senator Joe Simitian, a Palo Alto Democrat.

Inventors in Silicon Valley tend to go absolutely crazy when anyone talks about banning technology, so it was interesting to see the senator propose a ban on Radio Frequency Identification Tags (RFID) in government identification documents. RFID tags are an updated version of bar codes and the wave of the future for organizing and managing inventory and identities. Indeed, anyone who's visited Microsoft's (Nasdaq: MSFT) "home of the future" can see how the technology can be used to automate mundane tasks like grocery shopping.

Privacy Implications
Of course, Senator Simitian is worried about the potential privacy implications of the identity tags, but there are two responses to that issue. First, the data on an RFID tag can be limited or encrypted to ensure the safety of government employees. Second, taxpayers deserve a well-organized and managed public service. The proposal to ban RFID in government documents seems downright Luddite in a state like California. Then again, this is also the same state that failed to adopt voice over Internet protocol (VoIP).

At the end of 2004, a state reform commission recommended replacing costly landline telephone service with VoIP for government offices. The potential savings was calculated at up to US$6 million per month, yet Governor Schwarzenegger and the Legislature made no changes to state telephone service in 2005. This inaction follows on the heels of other stalled initiatives that could have boosted California's tech sector. Perhaps most disturbing is the passiveness of California's political leaders on the collection of an "iPod tax."

Under the guise of "simplifying" tax systems, state bureaucrats are working to reform tax codes to force digital goods vendors to collect and remit sales taxes for other jurisdictions. If implemented, this tax will harm both the content and hardware industries, creating an issue where Hollywood and Silicon Valley can actually agree. Then there's the cable franchise issue.

Changing the Marketplace
California likes to think it's the leader when it comes to new gadgets and services, but on the issue of video competition, Texas got there first. Cable franchise laws, which were put in place at a time when cable was pretty much the only game in town, are standing in the way of competition from the telcos.

Internet Protocol Television (IPTV) is set to do to the video market what VoIP did to the phone market: reduce prices and increase choice. But unlike the phone market, government regulations make it difficult for competitors to offer services to consumers. In 2006, California will need to fix its franchise system so that all players compete on a level playing field.

As Californians gear up to ring in the New Year, they may want to send a wish list to the California legislature. The state's tech sector is taking off again, but things could be better.

Government shouldn't compete with industry, ban technology, add new taxes to digital goods or allow interest groups to blackmail companies. Instead, policy leaders should save money by making use of new tech like VoIP and fuel competition by removing regulatory barriers to video market entry.