Three Potential Threats to California's Recovery

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A new year is always a good time for reflection; both to take a look back on the past year and to look forward to consider what challenges might lay ahead. At the start of 2015, I laid out five New Year's Resolutions Sacramento should have worked hard to keep in the New Year. Unfortunately, for the most part, California's policy leaders largely ignored these resolutions.

Now as we look forward to 2016, let's examine three potentially significant threats that could derail California's slow-but-steady economic recovery.

Over-regulation of the sharing economy: The sharing economy has been under continuous attack since it started to gain traction among consumers. And for one simple reason: it challenges the status quo, which regulators and bureaucrats do not like. Whether is has been California's Labor Commission unilaterally going against federal labor law and declaring Transportation Network Company (i.e. Uber) drivers employees not independent contractors, or the new idea put forth by San Diego Assemblywoman Lorena Gonzalez that TNC drivers, even if they are independent contractors, should have the right to collectively bargain, or if it is NIMBY-ism at its worst when activists in San Francisco attempted to impose a de facto ban on Airbnb, the sharing economy cannot idly sit by and expect their representatives in Sacramento to have their backs. Not only would over-regulation of this burgeoning industry squash innovation; it is a full-frontal attack on the next wave of industry coming out of the Silicon Valley-Bay Area, which as I've highlighted, is the singular driver of economic, labor force, and tax revenue growth for the Golden State.

San Francisco's housing market heating up too much: Some are arguing that San Francisco is at a serious risk of another housing bubble burst. Meanwhile, others don't think the city is in the midst of a housing bubble. Both are likely to be correct. While the home price-to-annual rent ratio (a good indicator of housing bubbles) for San Francisco, San Mateo, and Santa Clara counties currently is around 22 - which is over twice the national ratio - they are still significantly lower than before the 2007-2008 bust. However, while previous housing bubbles were characterized by over-building, the current over-heating is largely due to a restriction on supply. And therefore, the bubble may not burst because of supply saturation, but because demand collapses as businesses and individuals look elsewhere to locate their company or work and live. According to the Silicon Valley Leadership Group's annual Silicon Valley Business Climate Survey, housing costs rank among the top three business challenges and cost of living challenges. As other regions look to poach Silicon Valley-Bay Area talent and business, more competitive housing markets will be their number one pitch.

A not-so-temporary Proposition 30: In 2012, Governor Jerry Brown promised that if Proposition 30's income and sales tax increases were passed, they'd be a temporary fix to the Golden State's budget deficit. Now, as Prop 30's expiration rapidly approaches, some of the same special interests that funded the original ballot initiative are pursuing plans to either extend or make permanent some or all of Prop 30's tax increases. Prop 30 is particularly problematic for California because it doubles down on the state's worst tax feature: personal income tax volatility. Because California is so reliant on the personal income tax, which is heavily progressive and California's wealthiest are particularly reliant on capital gains realizations, slight variations in the stock market can yield massive swings in tax revenue collections. A surplus can literally turn into a deficit overnight. Since 1945, the average expansion has lasted 58 months. As of December 2015, we are in month 79 of the current expansion. If history is any measure, we are due for a downturn, and since Prop 30 has only made California more reliant on a volatile revenue source, Sacramento should remain wary.

Happy New Year's and here's to hoping that California's leaders pay more attention to these 2016 potential threats than they did to keeping some important resolutions in 2015.


Carson Bruno is the assistant dean for admission and program relations at the Pepperdine School of Public Policy. Follow him on Twitter @CarsonJFBruno.

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