But Higher Taxes, Spending Cuts And Unemployment Pose Threats To Broader Recovery
By Joshua H. Silavent - Staff Writer
(Editor’s note: Economic Outlook 2013 includes this introduction and separate stories on 9 different industries. We are presenting 2 of those industry stories online: financial services and real estate. The remaining 7 stories are available in the January 15 printed issue.)
January 15, 2013 - It seemed lawmakers in Washington had only three options available to avert the potentially cataclysmic stew of tax increases and spending cuts (known as sequestration) that made up the fiscal cliff. First, find compromise that limits tax hikes to a numbered few and ratchets back proposed reductions to domestic and defense spending. Second, continue to procrastinate and back away from the cliff by postponing the effective date of all provisions. Or, finally, drive headlong over the cliff, never breaking for the edge, and hope the country doesn’t fall into another recession.
But in a surprising and acrobatic feat, Congress has taken the first two approaches at once, all the while keeping the third alternative alive and well. And so another fiscal showdown between Democrats and Republicans is promised to us over the next several weeks.
The deal struck January 1 addresses, in part, the tax side of the fiscal cliff equation. The Bush-era tax rates for roughly 98 percent of Americans are now permanent, while individuals earning $400,000 or more – and families earning $450,000 and above – will be taxed at the Clinton-era rate of 39.6 percent.
Meanwhile, the capital gains rate for earners in the aforementioned tax brackets will rise to 20 percent, but remain at the current 15 percent rate for income earned below the threshold. Additionally, the estate tax is now 40 percent for the highest earners, up from 35 percent, with an exemption for the first $5 million in assets.
But these elements of the deal impact very few people – less than 2 percent of Americans, to be more exact. However, one provision impacts nearly every worker in the United States. The expiration of the payroll tax cut brings an end to a 2 percent discount employees received on the funding arm of Social Security.
Of course, the deal includes a litany of other incentives, stimulus and tax breaks that have some Americans breathing a sigh of relief and others in a head-scratching stupor.
For example, federal unemployment checks will continue for another year at a cost of $30 billion, helping to support those Americans who have been jobless for 26 weeks or more. Additionally, a number of tax credits for low-income families, first made law in 2009, will continue for another five years.
But businesses are getting in on the deal, too. Several corporate tax breaks – benefitting everyone from the railroad industry to NASCAR racing to Hollywood movie-making – have been extended while other taxes, such as a 1917 excise tax on rum, also carry forward.
Despite other key provisions – limits on deductions, modifications to how the Alternative Minimum Tax is calculated, pay freezes on federal employees, a nine-month farm bill extension – what is most significant and noticeable about the deal is what it lacks: a solution to sequestration. Congress, once again, kicked the can on spending cuts.
If sequestration ultimately comes to pass, the defense and aviation industries, which have a prominent stake in Long Beach and Southern California, will undoubtedly feel the squeeze of massive federal budget cuts to the Federal Aviation Administration and Department of Defense, among others.
The impact of the spending cuts reaches much further, however. Sequestration places in jeopardy about $12 million in federal funding the City of Long Beach receives, according to Tom Modica, director of government affairs and strategic initiatives. Housing, healthcare and workforce training programs would take the brunt of the reductions.
The fight over sequestration coincides with the approaching debt-ceiling limit – the very thing that kicked sequestration off in the first place. Many believe Republicans will again use the threat of national default as leverage to score the spending cuts they desire.
Of course, the single greatest threat to sustained economic recovery and growth is unemployment. Nationwide, employers added about 155,000 jobs in December, but the unemployment rate remained unchanged at 7.8 percent. “So this is a good report, especially now that we’ve gotten used to the idea that we are not likely to see rapid improvement in job gains,” said Kim Ritter, an economist with the Los Angeles County Economic Development Corporation. Though the economy added about 1.8 million jobs in 2012, 12.2 million people remain unemployed, with about 4.8 million jobless for 27 weeks or more, Ritter added.
The Federal Reserve has announced that it is tying interest rate increases to job growth, and rates are expected to remain unchanged until the national unemployment rate drops to about 6.5 percent.
The UCLA Anderson Forecast predicts that gross domestic product will increase at a 2 percent annual rate through the first half of 2013 while unemployment will remain relatively unchanged.
Meanwhile, California added jobs at a slightly better pace than the national economy last year, a rate of about 1.9 percent, compared with just 1.4 percent nationwide. The Golden State’s unemployment rate dropped below 10 percent in November for the first time since January 2009. The unemployment rate was 9.1 percent in the Los Angeles-Long Beach-Santa Ana metropolitan area in November.
Employment in the state could get a boost this year thanks to new tax revenues as a result of the passage of Proposition 30 and other, better-than-expected revenue gains. Gov. Jerry Brown recently announced that the state’s budget is in the black and that a projected $1.9 billion deficit has been dissolved. He is proposing a $97.7 billion budget this year.
The UCLA Anderson Forecast predicts employment in the state to increase 1.3 percent this year. By 2014, the jobless rate is expected to fall to 8.4 percent from a current 9.8 percent.
The expiration of the payroll tax cut – a 2 percent increase – doesn’t necessarily mean there will be a corresponding 2 percent reduction in consumer spending because Americans save money at a higher rate than they spend it, Ritter said. But the loss of additional discretionary income will certainly have a decided impact on the choices consumers make in 2013.
The real estate industry is likely to continue to rebound in 2013, with single- and multi-family housing having stabilized somewhat, even returning to growth in some markets. But the retail, industrial and office space sectors remain subject to the perils of the national economy – namely anemic job growth.
Meanwhile, despite relatively flat growth in 2012, the international trade industry is booming, evidenced by the hundreds of millions of dollars the Port of Long Beach and Port of Los Angeles will spend on infrastructure upgrades this year alone to accommodate the growing presence of mega-ships.
Finally, the Long Beach retail market remains plagued by a lack of large, destination shopping centers, but its restaurant industry is more robust than ever. The expiration of the payroll tax cut, however, promises to shrink the take-home pay of most Americans, meaning less discretionary income to spend eating out.
City Of Long Beach
“I think the economy is going to continue to improve, albeit slowly,” Mayor Bob Foster told the Business Journal, adding that he expects more business activity in the city in 2013 and, therefore, increased general fund revenue. A recent streamlining of the development services department, which brings new efficiencies to the building, planning, permitting an inspection process for new businesses, will also help facilitate growth, Foster said.
The city does face its fair share of challenges this year, starting with a projected general fund budget shortfall of more than $10 million for the 2014 fiscal year, which begins October 1. The city’s largest union recently agreed to pension reforms, which will cut this deficit by about $3.8 million. And the prospect of better-than-projected revenues means the budget could be in even better shape. But cuts will still have to be made. “It’ll still be a tight budget,” Foster said, “but a little bit more livable.” The city has slashed more than $200 million from its budget and eliminated more than 850 positions since 2004.
The loss of the redevelopment agency last year “still has an impact,” Foster said, calling the state’s decision to dissolve the agency “foolish.” He hopes it will return in some form down the road. “Its loss is still being felt because there’s a great deal of uncertainty on some of the properties and the projects that were in the pipeline,” Foster added. “Uncertainty is never good for business activity.”
A big challenge facing the city in the years to come is the need to improve and upgrade infrastructure and roadways. Federal dollars for these kinds of projects have been shrinking in recent years, particularly since stimulus funds ran dry. Foster said Long Beach needs to get creative and find ways to support these projects from the inside out. “We’ve got to figure out a way to invest in ourselves,” he said.
City Of Signal Hill
Like Long Beach, the City of Signal Hill also has felt the economic strain wrought by the closing of its redevelopment agency. City Manager Ken Farfsing said this, in part, explains why new development has been slow to emerge in the last year. In addition, the loss of the agency “effectively suspended our affordable housing program,” Farfsing said.
Things started to change in recent months, however, and 2013 promises to see renewed development in Signal Hill. For instance, Glenn E. Thomas Dodge Chrysler Jeep has acquired a Fiat franchise and will break ground on a new showroom this year. New residential construction is occurring along Pacific Coast Highway, just about the first of its kind since the recession hit, Farfsing said. But a proposed gas station on the Costco property has been held up by new oil and gas regulations, which prohibits new construction on top of old oil wells. In a city like Signal Hill, this acted as “a de facto moratorium on construction,” Farfsing said, adding that the city is considering writing its own ordinance or amendment to allow for such development.
On the bright side, the city’s finances are in good order. Farfsing reports that the 2012 fiscal year budget ended with a $1.7 million surplus. And a surplus is predicted for the current fiscal year as sales tax and other revenues recover. “But there’s issues on the horizon we need to deal with,” he added. “So we budget pretty conservatively.”
Signal Hill’s general fund, much like Long Beach, is supported by revenues from barrel taxes and permits on oil and drilling. Oil revenues for the current fiscal year are projected at $900,000, up about $50,000 from the 2012 fiscal year.
Finally, the new Signal Hill Police Station at 2745 Walnut Ave. will open this month and features 12 cells and a detective department.
City Of Carson
“I feel very confident and very optimistic about 2013 being much better than 2012,” said Mayor Jim Dear, adding that growth and new development are finally returning to the city.
For example, the Kia dealership is expanding to a new location along the 405 Freeway. Additionally, The Boulevards at South Bay, a 168-acre mixed-use residential and retail project between Del Amo and Avalon boulevards, is progressing smoothly. Finally, a new Olive Garden restaurant recently opened, which “I believe is signaling the growth and development of our restaurant row concept that was kind of on a hiatus during the recession,” Dear said.
Carson, too, is still feeling the pinch from the loss of its redevelopment agency, but its fiscal house is in good order, Dear said. Though city management has not projected a shortfall for the next fiscal year (the redevelopment agency was infusing about $3 million annually into the general fund budget), the city does have about $26 million in cash reserves if needed, “which for a city of our size is excellent,” Dear said. About $5 million was cut from the current year’s budget, and about $20 million has been slashed in the last few years, with job eliminations coming through attrition and retirement, rather than layoffs, Dear said.
A little talked about challenge facing Carson in 2013 is the state’s mandated release of non-violent offenders due to overcrowding in California prisons, Dear said. Most of these convicts, sentenced for burglaries, thefts and other property crimes, are returning to their homes and neighborhoods without the job skills or other education necessary to reform their lives. “Our community is not immune to that,” Dear said. Carson has seen a big uptick in car thefts and break-ins recently, he added. “We have to deal with that because it’s really a drag on the community.”