However what's not noted in the report is the dismal Black-owned business profile in California when it comes to access to capital
By ONME Newswire
SACRAMENTO—In CNBC’s annual “Top States for Business” ranking, California’s ranking reflects the reality of its economy, which is led by the tech industry and venture capital dollars, but bogged down by the ongoing cost of living crisis, high taxes, and unfriendly business policies.
“California’s competitiveness, our ability to attract and retain businesses, as well as to provide employees with an affordable qualify of life, continue to show clear warning signs thanks to our ongoing cost-of-living crisis,” said Rob Lapsley, president of the California Business Roundtable. “This ranking is an annual reminder of the state’s precarious future and economic solvency. Just like the state budget, our business climate relies almost exclusively on the highly volatile Bay Area’s tech region to grow or attract business.”
According to the survey, California received an “F” in cost of living and business friendliness which directly reflect the impact of the policies that are being passed by state and local government.
In addition, the state economy received a “D+” and the cost of doing business scored a “D.” The only categories in which California excelled were access to capital and technology and innovation, where the state scored an “A+” for each.
“Our overall rankings should come as no surprise to the governor and Legislature, who continue to push higher taxes, fees, and expensive regulations onto businesses,” Lapsley continued.
However, Black-owned businesses' access to capital is elusive in the above scoring of the state. This is evident by the number of Black businesses in key cities.
In fact, during the 2020 pandemic, the use of personal stimulus checks for business creation and the failure of PPP funding to reach Black business owners demonstrate that Black business owners—like Black consumers in general—struggle to access traditional lines of credit and capital, which forces them to seek funding outside of these institutional structures.
For example, a 2019 study from the Federal Reserve Bank of Atlanta found that Black entrepreneurs are much more likely to rely on personal funds and credit to finance their businesses, and the Small Business Credit Survey (SBCS) study cited earlier found that Black, Latino, or Hispanic-owned firms were not approved for the full requested financing “even when the Black-owned, Latino-owned, and white-owned firms were all categorized as presenting a low credit risk.” These studies show that Black entrepreneurs face many systemic barriers that rob them of investment and suppress development.
Also, Black-owned businesses are much more likely to be non-employer firms (sole proprietorships), according to the Brookings Institute. In 2019, only 4.1% of Black-owned businesses were employer firms, compared to 19% of white-owned businesses. If Black businesses accounted for 14% of employer firms (equivalent to the Black population share), there would be 798,318 more Black businesses.
The Brookings Institute also noted that if there were an increase in Black businesses throughout California, the jobs in the state's economy for minorities would improve. The stats reported below by the Brookings Institute reveal the revenue, jobs, and wages that places would gain if the percentage of employer firms that are Black-owned was on par with the metro area’s Black population share.
We assume an expansion in the size of the economy such that no gains in Black business revenue or size come at the expense of non-Black businesses. The estimations are based on revenue and payroll data from the 2018 ABS, as the 2019 and 2020 ABS have limited data on revenue at the metro level.
There are 125 Black businesses in the Fresno metro area, accounting for 1% of employer businesses. If Black businesses in this area accounted for 6% of employer firms (equivalent to the Black population), there would be 805 more Black businesses. Black businesses create an average of 6 jobs per firm, compared to 19 for all businesses in Fresno. If the average employees per Black business reached parity, it would create approximately 1,646 new jobs.
There are 7,200 Black businesses in the Los Angeles-Long Beach - Anaheim metro areas, accounting for 2% of employer businesses. If Black businesses accounted for 7.6% of employer firms (equivalent to the Black population), there would be 18,725 more Black businesses. If the average employees per Black business reached parity in these areas, it would create approximately 69,045 new jobs. If the number of Black businesses matched the population size and the employees per firm matched the average business, it would create 379,531 jobs.
In the San Jose-Sunnyvale-Santa Clara metro areas, there are 228 Black businesses, accounting for 1% of employer businesses. If Black businesses accounted for 3.3% of employer firms (equivalent to the Black population), there would be 1,148 more Black businesses. If the number of Black businesses matched the population size and the employees per firm matched the average business, it would create 35,914 jobs.
Finally, in the Northern Bay Area of Oakland-San Francisco-Hayward metro areas, there are 2,087 Black businesses, accounting for 2% of employer businesses. If Black businesses accounted for 8.8% of employer firms (equivalent to the Black population), there would be 8,126 more Black businesses. If the number of Black businesses matched the population size and the employees per firm matched the average business, it would create 193,541 jobs.
One can only imagine how such measures could boost the California economy.
In just the past 30 days, Governor Gavin Newsom and the CA Legislature have ensured some businesses will pay one of the highest tax increases in state history by not using the federally provided state funding to pay off the state-created Unemployment Insurance Fund debt and increased labor and litigation costs by proposing to refund the Industrial Welfare Commission in the state budget. The state's Unemployment Insurance (UI) Fund is over $17 billion in debt. According to the Tax Foundation, California ranks second to last in the nation as of 2021 for overall business tax burden as it is.
“The governor and Legislature’s policies continue to give clear signals that California is not a friendly place to expand or grow jobs. Technology and innovation, combined with access to capital, have disguised many of the major impacts that our policies are having on all other sectors in our economy. This report clearly reflects the harm these policies are having on businesses and working families,” Lapsley concluded.
Millions of Californians relied on the UI Fund to pay for bills and buy food for their families, to stay afloat when the state shutdown. Unfortunately, due to reduced state oversight, criminals made fraudulent claims for payment from the fund, resulting in more than $30 billion in fraudulent payments being disbursed by the California Employment Development Department. A vast majority of this money is unrecoverable, much of this fraud centered on the federal supplemental payments, but the spike in claims accelerated the draining of the state fund as well.
Starting in 2023, some California businesses of all sizes will start to pay increased taxes to pay off the UI Fund debt. Each year, the tax will increase until it hits the maximum tax per employee. In addition, employers will continue to pay at the highest state tax rate schedules for the foreseeable future if not long term if new economic downturns make it impossible for the state fund to recover.
For some minority-owned businesses in California, this tax increase would be stifling, especially those severely affected by the COVID-19 pandemic shutdown.
Findings from the Federal Reserve System’s 2021 SBCS revealed that the COVID-19 pandemic exacerbated the challenges that small businesses owned by people of color faced prior to the pandemic. Table 4 shows the percentage of small business owners by race that reported experiencing financial challenges in 2020. Most small business owners reported experiencing financial hardship during the pandemic, but the highest rate was reported by Black business owners: 92%, followed by 89% of Asian American-owned firms, 85% of Latino- or Hispanic-owned firms, and 79% of white-owned firms.
According to the SBCS, approximately 79% of Asian American-owned firms and 77% of Black-owned firms reported that their financial condition was poor or fair, while only 54% of white-owned firms reported similar conditions. Nearly 75% of Black- and Asian American-owned firms reported difficulties paying their operating expenses, compared to 63% of white-owned firms. Black small business owners were also the most likely to experience difficulty accessing credit (53%).
Reduced revenues due to the shutdowns and quarantines forced businesses to adapt their operations. Black- and Asian American-owned firms were most likely to reduce their business operations in response to the pandemic (67% each), followed by Latino- or Hispanic-owned firms (63%) and white-owned firms (54%). In response to financial challenges, Black business owners were the most likely to tap into their personal funds (74%), compared to Latino or Hispanic owners (65%), Asian American owners (65%), and white owners (61%).
Additionally, the first round of PPP loans gave relief only to employer firms. This disproportionately disregarded Black-owned businesses, 95% of which are nonemployer firms, compared to 78% of white-owned firms. When Black businesses did receive PPP loans,the funding arrived much later than for white businesses, and was often substantially less than what was offered to white businesses. “Black-owned businesses received loans through the Paycheck Protection Program that were approximately 50 percent lower than White-owned businesses with similar characteristics,” one nationwide study found.
Likewise, the SBCS shows that only 43% of Black-owned firms received all of the PPP funding they applied for, compared to 61% of Latino- or Hispanic-owned firms, 68% of Asian American-owned firms, and 79% of white-owned firms.
The PacificSun reported that the budget deal between the legislature and Gov. Newsom would resurrect the Industrial Welfare Commission,which was a small $3-million dollar line item--created in 1913 but dormant since 2004--to issue new rules on wages and working conditions for specific industries. It does not specify an industry for the new Industrial Welfare Commission to focus on, but it does direct it to prioritize industries in which 10% or more workers live below the federal poverty line—for which fast food likely qualifies, according to the PacificSun. However, the power to raise the minimum wage from the standard $15.50 per hour for fast-food franchises will be up to the voters in November 2024.