Dollars and Sense

California State Controller Betty Yee on tax reform, climate change and tips for small businesses

Back Q&A Jan 11, 2018 By Rich Ehisen

As the state’s fiscal watchdog, California State Controller Betty Yee has a finger on the pulse of what is now the world’s sixth largest economy. But her influence reaches far beyond just paying the State’s bills. We sat down with her recently to talk about taxes, climate change and why she is compelled to address issues like human trafficking.

People may think your office only deals with taxes, but you’ve weighed in on everything from human trafficking to affordable housing. Why do you feel it’s so important to take on these other issues?

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As the state’s independent fiscal watchdog, we are looking at the integrity of where our dollars are being directed. We do that in a number of ways. We pay all the State’s bills, monitor revenues and dispersants, handle payroll for over 250,000 State employees and California State University employees — and prepare the State’s comprehensive financial reports. I take positions on policy issues because, by virtue of my office, I also have a seat on 70 different boards and commissions that have a policy range from taxes to public pensions and much more. Human trafficking, for example, relates to my work on the victims compensation board. So, I do feel like it is important to weigh in when we see gaps in policies that could better-serve Californians.

You have advocated for California to undertake comprehensive tax reform. Is overhauling Proposition 13 the logical first step in updating the system?

My effort is one void of recommendations at this point, because I think there is so much public awareness and education that has to be done around our current tax structure. I think if you were to ask your average Californian where their taxes go, they would just look at you with a blank stare. They understand that taxes fund schools and a lot of the community services they’re used to, but in terms of where their actual dollars go they probably would not be able to give you a good answer. So this needs to be done, but many of these changes will likely have to be on the ballot and so there needs to be broader awareness by the public.

The tax structure is like a water balloon: If you start squeezing any one part of it, you’re going to have reverberations throughout the system.

What I have been doing is looking at the entire system. The tax structure we rely on today was primarily constructed during the 1930s, when we were still very much a goods- and manufacturing-based economy. Economic shifts have leapfrogged over that type of economy to a services-related economy, to a knowledge-based economy, to an internet of things economy to now a gig economy that has really turned our tax policy on its head. So reform can’t just tackle one aspect of the system. Prop 13 really wasn’t reform. It didn’t look at the entire system or how tax burdens would be shifted as a result of capping local property tax rates. I know there are proponents of just Prop 13 reform or of just expanding sales tax services. There are proponents of looking at how we can provide more exemptions and assistance for middle-class and lower-income households. All of that is fine, but frankly, the tax structure is like a water balloon: If you start squeezing any one part of it, you’re going to have reverberations throughout the system.

We rely heavily on taxing the highest earners. If we lower their rate, how do we make up that shortfall?

I think the fact of the matter is that we’re always going to have a system where those who make more should be taxed more. I think the question then is how do we deal with some of the issues around the high cost of being in California? Frankly, for many companies the regulatory environment here is an even greater hit to their bottom line than taxes. And throughout all of this is the want for certainty. Employers want to know that the rules aren’t going to change and the rug won’t be pulled out from under them. They want certainty to be able to plan and grow here in California. So I think taxes are only one important sliver of what we need to talk about in terms of making California a healthy state for economic growth.

You sit on the board for Ceres, a nonprofit organization working to get some of the world’s largest investors to take stronger action on climate change. What are you doing to encourage this kind of investment in California?

I also sit on the board of public pension funds like CalPERS and CalSTRS, where we’re very focused on climate change because it is becoming much more of a business risk. And so we look at how we can influence companies to think about transitioning some of their business practices, particularly with respect to energy and water use, all the way throughout their supply chain. The work with Ceres started when we began looking at the carbon footprint of the public equity portfolio of CalPERS. We learned we could attribute 50 percent of the greenhouse gas emissions in that entire portfolio to just 100 companies, which suggested to us that’s probably true with other investors as well. And so the work at Ceres is really looking at how we can influence the capital markets to try to be a catalyst for change in a more accelerated way. Ceres is part of a partnership to create a global engagement strategy with the top 100 global companies. This is a way investors can see we mean business when we say that climate change is a real risk if you are not addressing it in terms of your business plans.

Were you surprised by how strong the reaction was across so many industries to President Trump’s decision to pull the U.S. out of the Paris Climate Accord?

I was not surprised, especially in regard to multi-national companies that aren’t specifically in the energy arena. They already see the impacts of climate change around the world. More importantly, I do think this is now a bottom-line calculation for businesses. Sea-level rise, for example, is going to wreak havoc on the condition of our ports and the infrastructure around those ports. All of this is going to add to the cost of doing business if we don’t start paying attention to the effects of climate change. The urgency is that if we don’t pay attention to it now, by the time we do address it, the cost of doing so will begin to crowd out funding for every other critical public service. So, there is a true sense of urgency to this and, to the extent that we can get everyone to feel that sense of urgency, I think we’re just all better off.

We’re nearing tax season. Any words of advice to California’s small business community?

I come from a small business background: My parents had a laundry and dry cleaning business when we were growing up. There are actually a lot of points of assistance for small businesses with respect to taxes. There are a lot of tax incentives for California through the Governor’s Office of Business Development that I hope our small business owners are availing themselves of, as well as a number of grant and loan programs that get awarded through various financing authorities in the State Treasurer’s Office. So I would really point business owners to those entities. I’m happy to say that the California earned income tax credit, which will be entering its third year next year, has been expanded to allow self-employed individuals to be able to claim the credit, which we think allows small business owners to realize a real boost of money in their pockets. So definitely take advantage of those programs. 

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