Back in February, Tim Anaya and I interviewed for PRI’s Next Round podcast Cynthia Ariosta and Carl Dene, small business owners in Napa Valley, to get their perspective on Gov. Newsom’s COVID restrictions on small businesses. This heart-wrenching interview was one of our most listened to podcasts this year.
In his May revised budget, Gov. Newsom proposed to add another $1.5 billion to a grant program for small businesses impacted by the forced closures and restrictions. The free grants of up to $25,000 would come from federal relief funds and supplement the $2.5 billion in existing funds already allocated, boosting the total to $4 billion. Newsom also proposed adding $147 million to give eligible businesses a tax credit of up to $1,000 for each employee hired – 147,000 new hires.
Newsom started the grant program in December last year. About 334,000 businesses applied, totaling $4.4 billion in requests. But with only $500 million to spend, the program soon ran out of money. Moreover, the online application process, like pretty much any tech project undertaken by the state, was an “absolute nightmare,” said one applicant. Logins failed, error messages abound, and uploaded applications crashed computers. We can only hope that, unlike the current mess at the EDD, California’s Office of the Small Business Advocate is now better prepared to handle the traffic.
While the grants are helpful, small businesses in the state are still in a world of hurt. This doesn’t bode well for the state’s recovery. Contrary to conventional wisdom, Silicon Valley and Hollywood aren’t the backbone of California’s economy, it’s small businesses. Two separate studies, one by the U.S. Census Bureau and another by the Kaufman Foundation, found that net job growth was the strongest among businesses with fewer than 20 employees. And microenterprises, including both non-employer and up-to-5-employee businesses, comprise the largest segment of California businesses, representing 92.9% (3.8 million) of all businesses in the state.
The additional grants were welcomed news for small businesses. “Businesses don’t need more debt — they need resources that will get their lights back on, people back to work and communities growing once again,” said John Kabateck, California state director of the National Federation of Independent Business. Trouble is, what Newsom gives away with one hand, he takes away with the other.
California is one of the toughest places in the country to do business, and that was even before the pandemic. Newsom could have suspended the new minimum wage requirements for 2021 but didn’t. Small businesses (under 25 employees) are now required to pay employees $13 per hour, up from $12 in 2019. The minimum wage is scheduled to increase to $14 in 2022 and $15 in 2023 for the state’s smallest businesses.
Newsom also signed last year a revised California Family Rights Acts, extending the old law to businesses with five or more employees. Even very small businesses must now hold jobs open for up to 12 weeks for workers who want to take time off to care for relatives who are ill. While no one doubts the good intention of this law, small businesses can ill afford to hold open jobs while they fight for survival.
Another hammer — California small businesses have one of the highest income tax burdens in the nation. Small businesses generally operate as “pass-throughs” — profits are passed on to the owner’s tax return, who then pays tax on that income. In California, the top combined federal and state marginal income tax rate on pass-through businesses tops 51.9 percent according to the Tax Foundation. Taxing the rich inevitably means taxing the mom-and-pop restaurant, the immigrant grocery store owner, and the local doctor’s family practice.
The list of small-business-killing policies goes on and on, including the state’s onerous occupational licensing requirements and AB 5, which made it much harder for free-lancers to make a living. And the burdens could get worse if any of the bills on this year’s California Chamber of Commerce “job killer” list are enacted into law.
So, while the relief grants might give temporary cover for the state’s small businesses, fundamental reforms are needed for businesses to truly thrive. Otherwise, Newsom’s attempt to get “California roaring back” will end in a whimper.
Rowena Itchon is senior vice president of the Pacific Research Institute.