California's New Economy

California is leading the world in a revolution of productivity and economic growth. This revolution is centered on information, technology, innovation, and human capital. The state is by far the nation’s leading producer of electronic equipment and components and the machinery used to manufacture high technology goods. The state’s leadership is even greater in the areas of design, research, and development.

In addition to high-technology manufacturing, California is also the nation’s leading provider of computer services, including software and the Internet. From mid-1999 to mid-2000 (the latest period for which figures are available), the computer services industries added 101,000 new jobs, a growth rate of 36 percent. Information retrieval—the Internet—accounted for more than one-half of these new jobs, surging by 161 percent over the year. Computer services comprise not only the fastest growing high technology industry in the state, but also the largest—382,000 jobs as of June 2000. Figure A displays the computer services job growth by component.

The Administration proposes the following initiatives to keep California the world’s leader of the New Economy.

California Institutes for Science and Innovation—In 2000-01, the Governor launched a bold initiative to provide the University of California (UC) with $75 million annually for four years to develop three world-class centers for cutting-edge research in science and technology. These science institutes will advance knowledge and train the high-tech workforce needed in fields representing key sectors of California’s economy. State funds will be matched on a two-to-one basis by non-State funds. After a university-wide competition, the three most outstanding proposals were selected, as follows:

• The California NanoSystems Institute at UCLA, in collaboration with UC Santa Barbara, will enable design and construction of functional devices and materials with components that measure no more than a billionth of a meter.
• The California Institute for Telecommunications and Information Technology at UC San Diego, in collaboration with UC Irvine, will develop innovative new materials and devices to radically expand the capacities of communications and information infrastructures.
• The California Institute for Bioengineering, Biotechnology and Quantitative Biomedicine, at UC San Francisco, in collaboration with UC Berkeley and UC Santa Cruz, will bring together scientists in biomedical research, engineering, and physical sciences to seek breakthroughs in diagnosis, treatment, and prevention of disease.

The 2001-02 Budget provides the second $75 million increment of funding to these initiatives, and includes $33 million to begin development of a fourth institute, a Center for Information Technology at UC Berkeley. At the end of the three years, funding for the fourth institute will equal the funding provided for the first three institutes and will also be matched on a two-to-one basis by non-State funds. UC expects the actual match for all four initiatives to be closer to $3 for every State dollar—more than $1.2 billion in non-State funds over four years.

Internet2—The Budget provides $18 million in one-time funding to continue expansion of Internet2, a high-speed national data transmission network that will support cooperative research intiatives within UC and with other institutions and countries. In addition, the Budget continues $32 million in ongoing funding to expand internet connectivity and network infrastructure to K-12 schools and county offices of education.

California companies lead the world in developing and using information technology to do business better. The Administration is committed to providing an equivalent quality of service for the state’s citizens and businesses by seizing the opportunity to use the Internet and other new technologies.

This commitment is demonstrated by projects such as the Department of Motor Vehicle’s On-Line Vehicle Registration program which allows for electronic vehicle registration payments, and the Franchise Tax Board’s "e-file" program which allows individuals to file tax returns, make electronic payments, and arrange for automatic deposits of refunds.

Additionally, the Administration has begun implementation of the California Home Page and the E-Business Center along with the initial integration of these two portals. In 2000-01, studies will be completed or initiated to design the best approach to the following:

• Online Professional Licensing
• Online Competitive Bid Processing
• Interactive Employer-Employee Job Posting and Recruitment

One Stop E-Business Center—Over three dozen State departments regulate businesses in California. Companies and individuals spend an inordinate amount of time and money either standing in line or navigating disjointed reference sources on the Internet in order to comply with regulatory requirements. The E-Business Center is designed to be a one-stop web portal to provide a central source for government services and information for business. The Budget proposes an augmentation of $3 million General Fund to continue the development of the E-Business Center and complete pilot projects initiated in the current fiscal year, including the following:

• Online Professional Licensing—An online system to allow registered nurses, specified security guards, cosmetologists, and real estate salespersons to apply for initial and renewal licenses online. Based on the results from the first year of the pilot, more professional licensures will be added. This project will serve as a model of diverse professional classifications using one Internet application.
• Online Competitive Bid Processing—An online bidding project for Caltrans’ construction projects, which will provide the information to plan for the deployment of an Internet-based competitive bid process for other types of State construction.
• Expansion of E-procurement—An expansion of services to more small businesses in more geographical locations using information gathered from the E-Marketplace for Small Business study. This project is studying the readiness of small businesses to serve as a supplier for small government purchases online through an e-marketplace solution.
• Interactive Employer-Employee Job Posting and Recruitment—An interactive system to implement recommendations from a study conducted in the current year to migrate CalJOBS, an Employment Development Department job posting and recruiting system, to modern Internet architecture.

In addition, new projects will be developed related to customer relationship management, customer satisfaction, and the design and functionality of the E-Business Center, including the integration of the E-Business Center with the California Home Page infrastructure. The Budget also includes $1.7 million General Fund to continue to upgrade the California Home Page. A redesigned Government Services Portal will offer improved access by the public to all areas of state government, and will form the basis of a system that will allow departments to make government services available more quickly and at lower expense.

The Budget proposes targeted tax changes that are designed to reduce the tax burden on consumers and businesses, stimulate further expansion of small businesses and key industries, help relieve traffic congestion, and ease the shortage of qualified teachers. A summary of these tax proposals is outlined below.

• Back to School Sales Tax Holiday—In order to stimulate continued economic activity and provide Californians with additional tax relief, the Budget proposes a three-day sales tax holiday on back-to-school necessities for late August. This will assist California families by reducing their expenses on clothing, footwear, and computers by up to 8.25 percent. For three days, all sales tax will be suspended on each purchase up to $200 on clothing, $200 on footwear, and $1,000 for computers and related equipment. This proposal is similar to successful sales tax holidays offered in eight other states, including New York and Texas. Because a portion of the sales tax rate is imposed by local governments, these entities will have the option to not participate. General Fund revenue losses are expected to be $27 million in 2001-02.
• Increasing the Manufacturers’ Investment Credit—The manufacturers’ investment credit is an important factor in maintaining California’s competitive position for attracting and retaining firms involved in manufacturing—firms that can choose to locate anywhere. The current 6 percent credit is designed to partially offset the sales taxes that manufacturing businesses must pay on their California investments. In order to improve California’s position relative to other states for this key sector, the Budget proposes to increase the manufacturers’ investment credit from 6 percent to 7 percent. This increase is expected to result in revenue losses of $70 million in 2001-02, $90 million in 2002-03, and $95 million in 2003-04.
• Extending the Sunset for the Manufacturers’ Investment Credit and Exemption—Current law provides the manufacturers’ investment credit will terminate on January 1, 2001, or the earliest January thereafter, if employment in manufacturing in California (excluding aerospace employment) is not at least 100,000 higher than it was on January 1, 1994. Because about 200,000 jobs have been created since this credit was established, the termination of the credit will not be triggered this year. However, this annual test creates uncertainty for businesses and interferes with their ability to do long-term planning. Therefore, the Budget proposes to move the sunset test date to January 1, 2008.
• Adding Software Developers to the Manufacturers’ Investment Exemption—Software developers are eligible for the current manufacturers’ investment credit. However, the complementary State sales tax exemption for new firms’ purchases of manufacturing machinery and equipment, which usually provides parallel treatment to that provided by the credit, does not include software developers. To provide consistent treatment, the Budget proposes to add software developers to the manufacturers’ investment exemption, resulting in revenue losses of $500,000 per year.
• Space Launch Exemption—Competition with other states and countries for aerospace businesses is intense. California has been a strong competitor in this market, given its technological expertise. However, the State does not subsidize these businesses, as do some foreign and other state competitors. To improve the State’s competitive position in this major growth industry, the Budget proposes to expand the current sales tax exemption for space flights to include property used in spaceport operations or for assembly, launch, or transport. Expansion of this exemption will result in revenue losses of $6.3 million in 2001-02, $2.6 million in 2002-03, and $0.8 million in 2003-04.
• Increasing the Capital Gains Exclusion for Small Business Stock—In order to encourage long-term investment in California’s small businesses, the Budget proposes to increase the current 50 percent exclusion for gain from the sale of small business stock held for more than five years to 100 percent. This will apply to stock purchases after January 1, 2001. Revenue losses are expected to be about $30 million annually beginning in 2006-07.
• Employer Transit Pass Credit—To help relieve traffic congestion during peak commuter hours, the Budget proposes a credit for employers who provide subsidized transit passes to their employees. The credit would be 80 percent of the subsidy cost for employers who do not provide free or subsidized parking; 40 percent for employers who subsidize employee parking; and 20 percent for employers who provide free parking. This credit is intended to reduce traffic gridlock and improve air quality. Revenue losses are expected to be $3 million in 2001-02, $3 million in 2002-03, and $4 million in 2003-04.
• Loaned Teacher Credit—To assist in easing a shortage of qualified math and science teachers in the State, the Budget proposes a 50 percent credit for employers who lend employees to public schools to teach these subjects. This credit would apply to math and science taught in middle and high schools, and community colleges and will result in revenue losses of about $1 million per year.