Don't Bite The Hand That Feeds

One key concept in business is to take good care of your best customers. In the startup world, a marquee customer can lay the pipeline for further deals with that company as well as serve as a reference to get your foot in the door of new leads. In business when times get rough and the economy is in recession, it is important to hunker down and to think of creative ways to add revenue. Generally, you don't increase fees and rates to increase revenue. Doing so is a great way to get customers to stop using your product. When your customers are having tough times, you don't want to squeeze them. They will leave and never come back. You must get in better touch with your customer and perhaps come out with new products to meet their needs.

Most of the above is pretty intuitive for managers in business. This is in stark contrast to the way local, state, and the federal government is run. Governments like to compare themselves to businesses that have a simple business model - generate revenue through taxes and deploy the capital to services vital to the people. Essentially they have a pretty easy mandate - collect money and spend it. Try not to look dumb by spending more than you collect. Obviously California is having a problem and they look really dumb. And even the Feds look pretty dumb because anybody knows that in a time of fiscal crisis you must cut the fat and cut back on spending and new projects.

So California at this point is looking to increase taxes to make up for the budget shortfall. The White House is even worse as they are looking to create a new and expensive health care plan AND pay for it by taxing the wealthiest Americans. If California was a company and had stock it would surely almost be worthless. If the Federal Government was a company and had stock it would surely be almost worthless as well. When times are tough you get small and cut back. When times are good you lean in. If you are aggressive and well capitalized you can take advantage of the downturn and expand and grow. But most companies used leverage to get where they are today and are not sitting on a bunch of idle capital.

Both California and the Federal Government are well on their way to alienating their major revenue generators, wealthy taxpayers.

If I were running the state or the country I would take a different approach. Create products and incentives to attract customers (revenue generating taxpayers) to the state. Ideally, I would want a predictable revenue stream and I would create a flat tax. I would also want guarantees on that revenue stream beyond just one tax year so I would make tax payers pay their bill over a several year period. Thus like any good business, I would be able to lock in predictable customer payments over several years and create a nice cash flow cushion from which to budget and spend. I wouldn't have to waste time each year wondering how much revenue was coming in the door and waiting until the last minute to balance the budget. The budget could actually be balanced in advance based on the guaranteed payments.

Of course we all know that this would never happen. First because no one that smart in business is dumb enough to go into politics. And second, no one in politics is smart enough financially to think in terms of basic business.

Comments

[Cramer]

One of the problems in Cali is their excessive reliance on income- and sales-based taxes. This is due to Prop 13 that severely restricted revenues from property taxes.

The problem with income and sales taxes is they are highly pro-cyclical. When times are good the money rolls in and the state goes on a spending spree. When times are bad revenues collapse. So do the state's finances.

In theory, the state would save for a rainy day during good times. In practice, it never happens. Cali needs to start moving back to property-based taxes. They are much more stable. Housing bubbles happen a lot less frequently than economic downturns/recoveries.

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