Like in the 1990s, Southern California is taking an extra dose of the recession.
Back then, we had the double impact of the national downturn and the decline of the local defense industry. This time it’s the real estate industry. As a result, the greater Los Angeles area has the highest unemployment rate of any top 20 major metropolitan area, apart from Detroit. And where did our thriving manufacturing base go? Look across the Pacific.
This year, China became the world’s second largest economy. Sometime between 2020 and 2027, China will pass the United States as No. 1.
Los Angeles still represents the largest manufacturing base in the United States with 389,000 manufacturing jobs. To put that in perspective, that’s less than half of the 812,000 in 1990. Over the same time period, Los Angeles has added 1.5 million residents, a 17 percent increase.
In Los Angeles, you can still see some remnants of the old apparel-making economy, which used to employ more than 100,000 on the production line, sewing, cutting, dyeing, pressing, washing (and, more recently, tearing and sandblasting denim). Today, those shops are few and far between. That’s not to say there isn’t a thriving apparel industry here. It’s just “workerless.” Jobless recovery?
Here in Los Angeles, we come up with the products and hire the factories in Asia to produce them. (There are some notable exceptions in the apparel industry such as American Apparel Inc.) This means we have fewer total jobs but they are higher paid.
This is a microcosm of what is happening throughout the country. How did it happen? What began as a profit-booster has now become a survival mechanism for most manufacturers amid cutthroat competition. For now, it has created an unmet demand for those involved in the development cycle and skilled workers for specialty manufacturers, but that may not last. To further reduce costs and meet the demands of the marketplace, companies are now figuring out how to set up design and development centers across the ocean.
What can we do about this?
When President Obama spoke in Ohio recently, he once again proposed making the Research & Development Tax Credit permanent, along with increasing its value. The price tag is approximately $100 billion over the next 10 years. The R&D credit is a highly effective targeted tax incentive that helps drive the global competitive edge that we need.
Risk-taking
It is designed to encourage economic risk-taking by companies that employ people within our borders and it specifically excludes benefits based on work performed by employees outside of the United States. The federal credit combined with the state credit (most states have some kind of matching program) reduces developmental costs by up to 13 percent.
Although the R&D credit has been around for 30 years and enjoys bipartisan legislative support, politics have prevented it from becoming permanent. The incentive has expired numerous times before being retroactively renewed and once even lapsed for a year. The credit is currently expired, although it is widely expected to be renewed back to Jan. 1. The uncertainty of the credit, however, limits its effectiveness since companies discount its impact on their cost-benefit analyses.
To be certain, now is not a time to waver. China has upped the ante, offering a more lucrative R&D tax incentive than ours along with their already ultracompetitive labor cost structure.
In fact, China isn’t the only country with a better deal. We are now ranked 17th out of the top 30 Organization for Economic Cooperation and Development countries, including our neighbors Canada and Mexico. Count in many other countries that want our high-value development jobs like India, Japan, South Korea, Spain and France. We were No. 1 as recently as the 1990s.
The R&D credit currently costs an estimated $7 billion a year and according to studies, it more than pays for itself. According to a 2010 report by the Milken Institute, Obama’s permanent credit coupled with a 25 percent increase could boost real GDP by $206 billion, generate 270,000 manufacturing jobs and raise total employment by 510,000 within a decade,
An important point about the R&D credit is that it does not discriminate. Companies of all sizes, from small to Fortune 500 businesses, qualify. Our study of IRS data shows that while large corporations claim the largest share of credits, the relative impact on small to midsize businesses as a share of their total assets is significantly greater.
One of our clients here in Los Angeles, a midsize industrial manufacturer, is using its R&D refunds to hire more engineers and move to a new larger facility.
Republicans and Democrats agree on the value of the program and I can’t think of a better time to increase its impact. The R&D credit should be a fixture of our tax code. It’s time to put the politics aside and help slow the outflow of high-value jobs from Los Angeles and the rest of the country.
Brandon K. Edwards is president of Tax Credit Co., an independent provider of tax incentive consulting in Los Angeles.
