RAISING TAXES WOULD AGGRAVATE WOES ECONOMY NEEDS GOVERNOR TO CUT, NOT JUSTIFY, BLOATED PUBLIC PAYROLL.

Byline: Raymond J. Keating

WELL, the California recall election is on again for Oct. 7. Before venturing to the polls to decide if Gov. Gray Davis should be recalled and, if so, to choose who should replace him, voters need to explore the candidates' views on small business.

All politicians claim to love small business, but do their policy actions back up their stated affections?

Make no mistake: Small businesses are the lifeblood of innovation, economic growth and job creation. As reported by the U.S. Small Business Administration, businesses with fewer than 500 employees account for 99.7 percent of all employers, employ more than half the private-sector work force and generate between 60 percent and 80 percent of net new jobs across the nation.

Unfortunately, according to the just-released 2003 edition of the Small Business Survival Index, which I author each year for the Small Business Survival Committee, the actions of California's elected officials have been particularly hostile toward entrepreneurs.

The Small Business Survival Index 2003 ties together 21 different government-imposed or government-related costs into one index. Among the data included are taxes on personal income, capital gains and corporate income, property taxes, electricity costs, health care costs, workers' compensation costs and crime rates. The index allows the 50 states and the District of Columbia to be ranked according to how friendly their public policy environments are for small businesses and entrepreneurs.

California ranked a dismal 46th or sixth worst in the nation.

So what's California's problem?

Well, the big negatives come from high taxes on income. California imposes a top personal-income and capital-gains tax rate of 9.3 percent, as well as a corporate income tax of 8.84 percent. These tax rates rank among the highest in the nation. Such lofty levies hurt California's economy by restraining investment and risk-taking within the state or simply redirecting such productive economic activity to other states.

Why not start up, expand or invest in a business in Nevada, which imposes no personal income tax, no capital-gains tax and no corporate income tax?

For good measure, California's legal liability system, workers' compensation costs, electricity costs and gas taxes also rank among the most burdensome in the nation.

So, even while daunting state budget woes loom, California desperately needs to make its policy climate far more hospitable to entrepreneurs. If Californians want a state where economic opportunity can flourish, then tackling the state's budget problems through tax increases simply cannot be an option. California already is in a very deep hole in terms of being competitive with other states. To the contrary, California desperately needs to cut taxes, particularly broad-based levies like the income tax.

Voters must decide which candidate in the recall election grasps the true source of the state's budget shortfalls - that is, too much government spending. For example, according to U.S. Census Bureau data, per-capita state spending in California grew at more than twice the inflation rate from 1992 to 2000.

Leaving matters pretty much as they are - perhaps implementing some small policy changes - would ensure that California remains an inhospitable place for small business. Raising taxes would only make a terrible situation far worse.

What small businesses and the economy in California need right now is a governor who is serious about reducing the size of government and implementing pro-growth tax relief. This would send a clear signal that California truly welcomes small businesses, entrepreneurs and investors.