California Competitiveness
ISSUE BRIEF ~ May 2006

Issue/Background
AeA Position
Summary
AeA Staff Contact

Issue/Background
Even if California was doing everything right, the rapidly changing and fluid global economy would pose unprecedented competitive challenges for state policymakers who are passionate about ensuring prosperity and opportunity for all Californians. Yet, when it comes to such areas as fostering education in science and math, deployment of broadband, and encouraging research and development, we are not doing all we can to ensure that California can compete head-to-head with its global rivals.
It is the solemn responsibility of lawmakers to address the problems facing California. If we work together, problems can be addressed with balance and care, mindful that it behooves no one to address one problem in such a way as to create another, potentially more serious one. In such an environment, the technology companies that offer the best hope for the most broadly prosperous future for all Californians will continue to invest in this state, as any committed and loyal partner would.

AeA Position
Each of the measures discussed below will either place California technology companies at a competitive disadvantage from their out-of-state counterparts or will offer incentives to investing in the state.

Litigation
SB 1274 (Dunn) would reverse a unanimous California Supreme Court decision written by the well-respected Justice Mosk who, prior to being appointed by Governor Pat Brown to the Court, was elected Attorney General as a Democrat. As Attorney General, he established the AG’s Civil Rights division and was lauded by the late Senator Sam Ervin as "one of the finest constitutional lawyers in the United States.'' Nevertheless, SB 1274 would make it easier to bring California-specific anti-trust cases to trial, and hence harder for defendants to resist settlement demands, even though there is no evidence of trusts uniquely afflicting California, and even though such a rule was rejected by Mosk and all his colleagues because “it might effectively ‘chill’ ‘procompetitive conduct in the world at large, the very thing it is ‘designed to protect, ‘ by subjecting [competition] to undue costs in the judicial sphere.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 846).

Other bills that similarly pose significant increased litigation exposure for California technology companies are:

SB 1311 (Soto) would require every company no matter its size or location to have on-hand translators who can orally inform customers and employees in their “native tongue” of the contents of contracts.

AB 2371 (Levine) would impose an across-the-board rule banning an employer from requiring that Fair Employment and Housing Act disputes be arbitrated as a condition of hiring. This rule would apply even if the employee (such as a CEO or other executive) had significant bargaining strength and even though current case law already imposes tough, case-by-case, situation-specific standards requiring that such agreements be “conscionable.”

Corporate Governance
Imagine that those registered voters who chose to stay home on Election Day could block the election of an Assemblymember or Senator running uncontested for an office… just by staying home. SB 1207 (Alarcon), which would apply to California’s largest high-technology employers, would prevent a candidate who faced no opposition for a position on the company’s board of directors from being elected if a majority of shareholders at a meeting chose to abstain or failed to vote. And that same candidate – the one with no opposition – would then be forever barred from serving on the board by appointment. The bill appears to try to foster “corporate accountability,” but we must respectfully question how empowering abstainers to prevent board of directors quorums in just California-based companies is in California’s best interests.

Health Care
The skyrocketing costs of health care poses significant problems for employers and employees alike. Employers have a profound interest in having their workers be healthy and, thus, productive. Employees want to know that they can provide for their families. Labor disputes that disrupt the lives of both companies and employees are now more about health care than wages or hours. Spiraling health care costs are wreaking havoc with companies’ bottom lines. The state too has a huge stake, both morally and fiscally.

Health care is thus quintessentially the kind of problem that should be addressed cooperatively, with care, and with balance. But, consider SB 1414 (Migden), which would mandate that a California employer with 10,000 or more employees in the State spend 8% of their total wages on employee healthcare costs or pay the difference in their healthcare costs and the 8% to Medi-Cal. This bill creates an incentive to keep wages low. A health plan amounting to, say, 7.8% of wages may be ample, depending on the workforce. An employed person with some health benefits will not likely qualify for Medi-Cal. Employers – particularly high-tech employers – are not the cause of skyrocketing health care premiums, yet this measure would abandon any effort to look comprehensively at healthcare reform that will result in cost containment and affordability for employers and employees.

Human Resources
California law requires the payment of “premium overtime” rates for all hours worked in excess of eight per day or forty per week, unless an exemption applies. Unique to California regulation, computer software professionals meeting a series of tests established in California Labor Code Section 515.5, including the exercise of independent judgment and hourly pay of at least $47.81 per hour, may be paid straight-time overtime for hours in excess of eight hours per day and forty hours per week, but they must be paid for each hour worked. The categories for applying the overtime exemption to computer professionals are less than precise, and the level of specialized knowledge required by existing law means that few employees will qualify for the computer professional exemption. Under this vague law, high tech companies are at risk for large overtime claims, with substantial penalties, even when the employer has no intent, malice or fraud. No legislation that would clarify the law is in place at this time, however AeA is supportive of clean up in this area.

Tax and Fiscal Policy
The high tech industry faces extreme competition and rapid technological advancements that result in compressed research and product cycles, skyrocketing research & development costs and increasing capital requirements. In today’s fiscal climate, California high technology firms must compare their operational costs to other locations globally. The State’s economic recovery is still extremely fragile, and must be sustained through wise state fiscal policy.

Past state tax and fiscal policies have had a major positive impact on high-tech success. AeA encourages the legislature to reach a balanced budget in California by critically reviewing and capping necessary state expenditures and wisely considering the impact on business of any proposed tax increases. A strengthened economy will facilitate better conditions for California businesses, workers, citizens and the State. AeA supports the continuation of those California tax policies and fiscal reforms that have served to improve and strengthen the California business climate.

Sales and Use Tax Exemption California does not have a full sales and use tax exemption that manufacturers in more than 30 other states enjoy. To improve the manufacturing and research and development activities within California, there needs to be an exemption to grow and retain these high paying jobs in California. California risks losing high paying jobs with the policy of charging a full sales and use tax on equipment purchases. AeA supports AB 2218 (Torrico), SB 1291 (Alquist), and SB 1643 (Runner).

Increase to California Research & Development Tax Credit High technology firms must plan over 10 or more years when considering new facilities. California’s current permanent R&D credit allows for certainty, consistency and predictability. AeA supports AB 2032 (Lieu) which would increase the credit rate from 15 % to 20%.

Income Tax Apportionment AeA supports the change from the double weighted sales factor formula used today in California to a single factor based on sales within California proposed in AB 1037 (Frommer). This legislation would encourage more businesses to locate within the state.

Health Savings Account (HSA) Conformity Federal legislation authorized income from HSAs to be tax free for federal purposes, but California is currently among a handful of states that continue to collect taxes on HSA income. AeA supports SB 1584 (Runner), SB 1639 (Dutton), and AB 2010 (Plescia) that would conform health savings accounts into California law.

Summary
Keeping California high technology companies competitive is not an abstract goal desirable in and of itself. It is a public policy strategy that recognizes the role such companies will play in ensuring future prosperity and enduring opportunity for all Californians.

AeA Staff Contact
Roxanne Gould
Senior Vice President, California Public Affairs
roxanne_gould@aeanet.org or 916.443.9059 x101 

This page was last updated on 10/16/06.  
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