Evaluating State Economic Stimulus Proposals

Evaluating State Economic Stimulus Proposals GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 2021 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary The state can seek to encourage short-term economic activity through spending increases or tax reduction programs that get people employed, increase consumer spending, and spur businesses to invest. During economic slowdowns, like the one the state currently is experiencing, interest in these types of economic stimulus programs is heightened. In this report, we offer the Legislature guidance on how to evaluate stimulus proposals. Recognize Limitations on State Funded Stimulus Unlike the federal government—which can run a deficit to pay for fiscal stimulus—the state must balance fiscal stimulus with other one-time and ongoing spending priorities. Ask Key Questions to Assess Stimulus Proposals What is the source of funding? Does the proposal have other strong policy justifications? How does the proposal interact with other federal, state, and local programs? How might the expected benefits and costs be overstated or understated? Will the benefits be realized when they are needed? How might the benefits be distributed? Incorporate These Elements for More Effective Stimulus Given the state’s spending constraints, economic stimulus is most likely to be effective if new programs: Are funded using federal funds, a state General Fund surplus, or proceeds from previously authorized bonds. Efficiently advance other legislative policy objectives. Complement (and do not duplicate) other federal or state programs. Can be implemented quickly. Are well designed and clearly targeted. Avoid making existing inequities worse. www.lao.ca.gov 1 analysis full gutter AN LAO REPORT INTRODUCTION COVID-19 Pandemic Severely Disrupted has been incomplete and remarkably uneven. In California’s Economy. The beginning of the particular: coronavirus disease 2019 (COVID-19) pandemic • Some Sectors of the Economy Recovering in early 2020 disrupted California’s economy in an More Slowly Than Others. COVID-19 has unprecedented way. In the spring, the economy had the biggest effect on close-contact abruptly ground to a halt: millions of Californians jobs and industries related to tourism and lost their jobs, businesses closed, and consumers discretionary in-person services. Employment deeply curtailed spending. in industries such as personal care services; Rapid Rebound Results in Incomplete, accommodations and food services; motion Uneven Economic Recovery. Almost as quickly, picture and video; and arts, entertainment, Californians began to adjust to the realities of the and recreation experienced relatively large pandemic. With this adjustment, and accompanying declines in employment and are recovering major federal actions to support the economy, much more slowly than most other came a rapid rebound in economic activity over the industries in California. Figure 1 shows how summer and into the fall. This recovery, however, employment losses varied across sectors of Figure 1 Percent Change in State Employment by Sector Percent Change Since January 2020 10% Financial Activities 1% 0 Construction -3% All Other Sectors -5% Manufacturing -7% -10 Information -10% Other Services -19% -20 Leisure and Hospitality -24% -30 -40 -50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT the state economy. In all industries, however, that get people employed, increase consumer unemployment was concentrated among spending, and spur businesses to invest. (Stimulus low-income workers while high-income also can refer to other government actions such workers were largely unaffected. as regulatory changes that affect the demand • Women, Younger Adult, and Latino for goods and services by the private sector, but Workers Disproportionately Affected. this is not the focus of this report.) While these COVID-19-related job losses have affected short-term benefits can help speed the state’s Latinos, younger adults, and women economic recovery from a recession, the state also disproportionately, as these Californians are must balance fiscal stimulus with other one-time overrepresented—relative to their share of the and ongoing spending priorities. As we describe in populations—in the industries that were most our November 2020 report, Update on COVID-19 affected. In addition, the closures of schools Spending in California, the state has already taken and childcare providers during the pandemic some important actions to mitigate the adverse also appears to have disproportionately economic and health consequences of COVID-19. affected workers with children, especially The 2021-22 Governor’s Budget also proposes women. The labor force participation rates several new spending and tax reduction programs among women with children declined that could mitigate the economic consequences significantly more than among men during of the pandemic and stimulate the state economy. 2020. These include new programs to provide fiscal relief to low-income Californians and small Our December 2020 Economy & Tax post, businesses impacted by the pandemic, funding for COVID-19 and the Labor Market: Which Workers infrastructure, and other new spending that could Have Been Hardest Hit by the Pandemic? describes stimulate the economy. We analyze these proposals the unequal economic and employment effects of in separate publications available on our website. the pandemic. Beyond the proposals in the Governor’s budget, Full Economic Recovery Will Not Be Possible we anticipate that the Legislature will be asked to Until Public Health Emergency Has Been consider the economic effects of new proposals Resolved. The COVID-19 pandemic is ongoing over the coming months and years. This report and, while vaccines are being distributed and provides (1) context for understanding the state’s administered, their widespread distribution is still capacity for economic stimulus; (2) guidance for some months away. Reaching a full recovery will assessing legislative or spending proposals based be a slow process that will depend heavily on on their potential economic benefits, in addition to continued progress on management and treatment any other policy considerations; and (3) specific of the virus. In the meantime, the state continues to comments about economic stimulus in the context face significant economic uncertainty. of the current economic and public health situation. Fiscal Stimulus Can Aid Economic Recovery. In the Appendix of this report, we summarize other State government can provide financial relief work our office has done in the past on evaluating and encourage short-term economic activity the economic effects of state programs and using fiscal stimulus. Fiscal stimulus consists of policies. spending increases or tax reduction programs www.lao.ca.gov 3 analysis full gutter AN LAO REPORT STATE CAPACITY FOR STIMULUS MORE LIMITED THAN FEDERAL GOVERNMENT In this section, we discuss the roles of and policy to stimulate economic growth. recent actions taken by the federal and state Monetary policy includes influencing interest governments to stimulate the economy. rates and increasing the supply of money. In response to COVID-19, the Fed has Federal Government Has Significant committed to keeping interest rates very low Capacity for Economic Stimulus for an extended period of time. Congress also provided the Fed with additional • Federal Government Has Few Restrictions authority to make extraordinary loans on Spending. The federal budget is able directly to businesses and to state and local to operate at a deficit. In 2019, the federal governments. States have no role in monetary budget deficit was around 5 percent of gross policy. domestic product (GDP). • Federal Response to COVID-19 Has State Fiscal Capacity for Stimulus Increased Size of Deficit. The federal budget Spending Is Limited deficit, as a percent of GDP, grew by more than 10 percentage points in 2020 (to around • California Must Balance Budget. The state 15 percent) due to the federal government’s has less capacity for fiscal stimulus than the response to the COVID-19 public health federal government primarily because the emergency. The U.S. Congress passed a State Constitution requires enactment of a major fiscal stimulus bill in March 2020 that balanced state budget. There are only limited enhanced unemployment insurance benefits, ways—bonds and savings from prior years— provided broad-based cash assistance to for the state government to spend more than individuals and businesses, and provided it collects in revenue in any given year. financial assistance to states and local • Capacity for State Fiscal Policy Is governments. We estimate that individuals, Relatively Small. The state’s budget is much businesses, and public agencies in California smaller than the federal government’s, which received more than $300 billion in financial also limits the capacity for fiscal stimulus. assistance from the federal government in California’s entire budget is about 6 percent of response to the COVID-19 public health the state’s economic output. In comparison, emergency in 2020. This financial assistance the federal government spending increase in at the onset of the recession likely mitigated 2020 alone was more than 10 percent of the its negative economic effects for several U.S. economy, as mentioned above. Without months. Individuals, businesses, and public a constitutional balanced budget requirement, agencies also will receive billions of dollars federal spending can increase significantly to in additional financial assistance during provide impactful fiscal stimulus—as it did this 2021 from another major economic stimulus year. Moreover, during periods of economic package that Congress enacted at the end hardship, the state budget typically shrinks as of 2020. (Further federal action is possible in lower incomes and lower spending reduce the coming months.) tax base. • Federal Reserve System (the Fed) and Monetary Policy. The Fed may use monetary 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT ASSESSING ECONOMIC STIMULUS PROPOSALS In this section, we first explain generally services. Ultimately, the total increase in the how economic stimulus can work and why it number of jobs, income, and economic output often is challenging to accurately estimate the of the state’s economy may be somewhat economic benefits. We then provide a framework bigger than the amount of new spending— for assessing the merits of economic stimulus this is called an economic multiplier. An proposals. increase in public spending may also “crowd in” (encourage) or crowd out (displace) some HOW DOES ECONOMIC STIMULUS private-sector spending and investment. Such private sector responses further affect the size WORK? of the multiplier. Economic stimulus may be accomplished • Opportunity Costs. When funds are used through either spending increases or tax for economic stimulus, they are not available reductions. The state sometimes adopts a new for alternative programs or spending. These program with economic stimulus as the primary alternatives also would provide economic objective. However, many state programs with benefits, which are lost when funding is another intended objective may also have economic allocated elsewhere. The forgone benefits benefits. An economic stimulus proposal can have from unfunded alternative uses are known as a variety of economic effects. On the positive opportunity costs. In other words, opportunity side, economic stimulus can create new economic costs are the answer to the question: What activity directly, as well as indirectly through other state programs would have been funded so-called “multiplier effects.” On the negative side, if the stimulus program had not been created are so-called “opportunity costs.” The overall and what would have been the benefits of economic effect of a stimulus proposal depends on those other programs? The size of opportunity the balance of these positive and negative factors. costs in large part depends on the source of funding, as we discuss in more detail below. • Direct Economic Effects. New state spending may (1) directly increase state employment; (2) increase state purchases QUANTIFYING ECONOMIC of goods and services from the private BENEFITS OFTEN DIFFICULT sector; and/or (3) increase private-sector employment, spending, and investment. • Studies to Estimate Economic Benefits Similarly, a tax reduction also may increase Often Have Many Limitations... Quantifying employment, spending, and investment in all of the potential economic effects of a the private sector by increasing residents’ change in policy is difficult and subject to after-tax incomes. These direct economic a significant amount of uncertainty. In rare effects can increase the overall size of the cases, gauging the potential benefits of a state’s economy provided they do not “crowd proposal by looking at economic research out” other economic activity, as we discuss of the historical experiences with similar below. programs may be possible. In many cases, • Multiplier Effects. As employment, spending, however, such high-quality information is not and investment increase, other indirect available. In place of learning from the past, economic effects also occur within the other types of economic studies attempt to state’s economy. The resulting increase in use models to estimate economic benefits personal and business income circulates under certain specific assumptions, which throughout the economy, as households may or may not be accurate. This approach and businesses purchase other goods and www.lao.ca.gov 5 analysis full gutter AN LAO REPORT has many significant drawbacks. Importantly, What Is the Source of Funding? assessing these models’ reliability can • Fiscal Stimulus Spending Generally be difficult because there often are major Requires Making Trade-Offs. Funds used practical barriers to checking the assumptions for stimulus spending will be unavailable for and predictions against real-world outcomes. other government programs and services. For example, differentiating a particular The extent to which the Legislature must policy’s effect on employment from the trade spending on fiscal stimulus with other variety of other complex factors that drive priorities depends on the source of the funds. employment changes is very difficult. Further, • Trade-Off Heightened for New State some economic studies omit significant Spending. New General Fund spending can economic considerations, such as the require reductions elsewhere in the budget opportunity costs. As a result, relying solely because of constitutional restrictions against on the results of estimated jobs or economic deficit spending. While new stimulus programs output from these types of studies to evaluate or tax incentives could have economic a stimulus proposal likely will lead to an benefits, cuts to funding for other state incomplete assessment. programs or tax increases can have negative • …But Studies Still Can Provide Useful economic effects. This trade-off means that, Information. Even if economic studies face in many cases, it is difficult to be confident significant challenges in quantifying economic that any increase in economic activity from benefits, these studies often provide other a new stimulus program would not be more useful information. For example, studies than offset by the corresponding decrease in often describe the intended policy outcomes economic activity from less funding to another and qualitatively discuss the potential state program. economic effects of proposals. These • Federal Funds Require Fewer Trade-Offs. studies also can highlight important but less Federal funds, if available, are the best source obvious economic effects of spending or tax of funding for fiscal stimulus because they proposals. For example, an economic impact may not require a reduction in other state study of a transportation investment might spending. The potential economic benefits estimate the economic benefits of improved of federally funded stimulus depend on mobility and safety, in addition to the direct the specific circumstances of the federal economic benefits of the engineering and programs providing funds. For example, there construction activities. This information can typically are restrictions on how the funding help policymakers evaluate the stimulus proposal for its other Figure 2 potential policy benefits. Key Questions to Ask When Evaluating Economic Stimulus Proposals KEY QUESTIONS TO 9 ASK WHEN EVALUATING What is the source of funding? ECONOMIC STIMULUS 9 Does the proposal have other strong policy justifications? PROPOSALS 9 How does the proposal interact with other federal, state, and local programs? Given the challenges of quantifying economic benefits, we recommend 9 How might the expected benefits and costs be overstated or understated? asking six key questions, summarized 9 in Figure 2, to make a more complete Will the benefits be realized when they are needed? assessment of the merits of economic 9 stimulus proposals. How might the benefits be distributed? 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT can be used. Additionally, many federal » Increases Total Cost. Interest payments on programs require the state provide matching the borrowed funds somewhat increases funds. Federally funded fiscal stimulus allows the total cost of bond-funded projects. The the state to increase economic activity additional cost often is offset by having the while making fewer trade-offs among other benefits of those projects much sooner spending priorities. As a general guideline, the than had they been funded conventionally. Legislature should maximize the use of federal When interest rates are high, the cost of funds. borrowing also is high, but the opposite • Borrowing Trades More Spending Now for is true when interest rates are low. The Less Spending Later. Issuing bonds allows actual cost of borrowing depends on the the state to significantly increase current market conditions when the bonds are spending, but there are three important sold. Figure 3 shows that interest rates trade-offs to consider. for ten-year U.S. treasury bonds, which are closely related to changes in state » Voter-Approval Required. The state borrowing costs, currently are at historic uses bonds primarily to pay for the lows. planning, construction, and renovation of infrastructure projects such as bridges, » Debt Service Reduces Fiscal Resources. dams, prisons, parks, schools, and Debt service payments reduce the office buildings. The state is prohibited amount of resources available for other from borrowing money to finance state state spending for many years. For this operations. In most cases, voters must reason, bond-funded spending should approve new bond authority before the be spent in ways that produce ongoing state can raise the funds—a process that benefits rather than one-time benefits. increases the amount of time between Moreover, unlike other state spending, when the need for stimulus is identified and debt service cannot be scaled back during when any new spending may occur. economic slowdowns. As a result, high Figure 3 Bond Interest Rates Historically Low Interest Rate for Ten-Year U.S. Government Bonds 16% 14 12 10 8 6 4 2 1960 1970 1980 1990 2000 2010 2020 Source: Organization for Economic Co-operation and Development. www.lao.ca.gov 7 analysis full gutter AN LAO REPORT debt service costs put pressure on other likely will be presented with “green” stimulus parts of the state’s budget when state proposals in the coming months and years revenues are down. This means that the that purport to stimulate the economy and trade-off between bond-funded stimulus also have an environmental benefit. Our and other spending is greater when the office recently released a separate report, A state’s existing debt service costs are Framework for Evaluating State-Level Green higher. Figure 4 shows the historical ratio Stimulus Proposals, to provide guidance of debt service costs to General Fund for the Legislature on how to evaluate such revenues. The current debt-service ratio of proposals. Rarely will it make sense for the 4.1 percent in 2020-21 is somewhat below state to adopt a proposal for the sake of the historical average of 4.9 percent in the potential economic stimulus alone, given the ten prior years, and well below the peak of state’s limited fiscal capacity. Instead, the 6 percent in 2009-10. Legislature should prioritize proposals that achieve other policy goals while also offering Does the Proposal Have Other Strong potential economic stimulus. Policy Justifications? • Programs Providing Little Short-Term Stimulus Can Still Have Long-Term • Would the Stimulus Proposal Advance Economic Benefits. Some programs that do Other Legislative Priorities? Given that not create immediate economic benefits may few state-funded stimulus proposals are nonetheless generate significant economic likely to generate large benefits (relative to benefits or fiscal savings over a longer period the size of the state’s economy), and these of time. For example, a program to increase benefits often are very uncertain, considering the energy efficiency of state-owned buildings the broader policy effects of the proposals might not provide immediate economic is important. For example, the Legislature benefits if the equipment is purchased from Figure 4 General Fund Debt-Service Ratio Percent of General Fund Revenues Spent on Debt Service 7% 6 Authorized, but Unsold 5 4 3 Bonds Already Sold 2 1 95-96 00-01 05-06 10-11 15-16 20-21 25-26 Projected 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT suppliers located outside the state. However, How Might the Expected Benefits and the program should be considered on its Costs Be Overstated or Understated? policy merits—in this case, reducing ongoing The benefits and costs of new stimulus programs state operating costs—in the context of other may be less than or greater than expected if state budget priorities. the initial assumptions turn out to have been inaccurate. The actual economic benefits and costs How Does the Proposal Interact of stimulus programs depend in part on factors With Other Federal, State, and Local that are uncertain, such as future labor market Programs? conditions and behavioral responses by affected businesses. Asking the following questions can • Avoid Unnecessary Duplication. Before help Legislators assess whether the estimated creating a new stimulus program, economic and fiscal effects presented to them are policymakers should take stock of existing reasonable. efforts at the federal, state, and local levels. Having many similar programs spread across • Is This an Established Program or a New different state agencies or different levels of Program? The estimated benefits from government can be inefficient and confusing increased funding for an existing program for the people or businesses the programs with an established history are likely more are intended to benefit. For example, in our certain than estimates for a new program. analysis The 2019-20 Budget: Opportunity A proposal for a new program might have Zones, we argued that creating a new state optimistic economic or fiscal estimates that do Opportunity Zone program to fund affordable not account for factors that could significantly housing would add an unnecessary layer of reduce the net benefits, such as unforeseen complication to the financing of affordable implementation difficulties or low participation housing. rates. • Find Ways to Complement Existing • How Large Are the Administrative Programs. As mentioned previously, the Costs? All programs have costs for public federal government’s capacity to fund stimulus administration. The administrative costs programs far exceeds the state’s. Given the of an economic stimulus program ideally state’s more limited role, finding ways to should be a small share of the overall complement, and not duplicate, federal efforts cost. A small program with a complicated can be especially important. For example, last enrollment process may have relatively high year the state expanded financial assistance administrative costs that diminish the amount to undocumented individuals that are not of funds available for delivering the intended eligible for federal stimulus programs. economic benefits. On the other hand, a large • Be Cautious of Unintended Interactions. program with low administrative overhead may Unintended interactions between a new be more efficient. stimulus program and other federal, state, and • Will the Program Effectively Increase local programs can reduce its effectiveness. Private Sector Hiring and Investment? Many Policymakers should carefully consider these state programs—such as tax reductions, potential interactions. Examples include: loans, and industrial subsidies—are intended Could increasing assistance for people or to encourage people or their businesses businesses through one program affect their to take certain actions that would increase eligibility for other programs? Could a change spending, hiring, or investment. For example, in state tax law affect Californians’ federal in 1980, the state adopted a program taxes? Do state actions to increase funding that reduced the taxes of companies that for one program impede local efforts to fund invested in new technology that increased the related programs? efficiency of their power plants (specifically, www.lao.ca.gov 9 analysis full gutter AN LAO REPORT cogeneration systems). However, the amount sourced from another country might be lower of the tax savings was too small to have an than expected if the estimates had assumed effect on the number of qualified power plants unadjusted average construction industry that were built or retrofitted using the new multipliers. technology. As a result, the economic benefits from the program were more than offset by Will the Benefits Be Realized When reductions in state spending elsewhere in the They Are Needed? budget to pay for the program. In considering targeted incentives to increase spending, • Fiscal Stimulus May Be More Effective hiring, and business investments, balancing During A Recession. New public spending the cost of the program with its likelihood of is likely to be more effective at stimulating the being large enough to actually change the economy during and immediately following decisions of people or businesses is critical. a recession rather than late in an economic • Are There Constraints in the Labor Market? expansion. This is because the increased Fiscal stimulus often is intended to create public spending may be less likely to displace new employment opportunities. Certain private sector spending due to the amount circumstances can make the economic of slack in the economy. For example, state stimulus more effective at increasing projects are less likely to be competing with employment. For example, stimulus may be private businesses for goods and services that more effective when overall unemployment are in limited supply. is high or when the stimulus is targeted at a • Consider the Timing of When Benefits sector with high unemployment. Conversely, Will Occur. The benefits of a new stimulus stimulus can be less effective when there program will take some time to occur. The are constraints that would make hiring amount of time will depend on both how difficult—for example, when unemployment quickly the program can be implemented as is very low for key occupations and licensing well as how quickly the new initial economic requirements or other factors prevent new activity circulates throughout the economy. workers from joining the local labor market. For example, a completely new program • How Much of the Funding Will Be Spent may take several years to be implemented Outside the State? As our economy is fully. Similarly, the planning, permitting, closely integrated with other states and other and completion of the final design of new countries, some of the economic benefits construction projects can take several years, from new spending in California will go to even if preliminary designs were previously areas outside the state. The extent of these completed. Assessing the timing of new so-called “spillover” effects can affect the stimulus spending may be possible by overall economic benefit to California from examining similar investments made in the new stimulus spending. One key question past. Increasing funding for existing programs to ask to assess the extent of spillover is: could more quickly provide economic benefits What portion of the workers and materials will than creating a new program. come from within California? If more comes from within California, then the economic How Might the Benefits Be benefit from the stimulus spending will be Distributed? bigger. However, if a project relies on a lot of materials that are not locally sourced, then • Many State Programs Benefit a Specific the spillover might be large and the benefit Group or Region by Design. Many state could be smaller or negative. For example, the programs directly benefit one group or economic benefit from a bridge replacement another, rather than all residents broadly. project that requires buying steel components For example, expanding childcare primarily 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT benefits families with young children and • Consider Whether Stimulus Proposals reducing college tuition primarily benefits Might Exacerbate Inequities. Low-income college students. Economic stimulus can be households and small businesses may be less broad or targeted. In assessing an economic prepared to apply for broad-based financial stimulus proposal, consider which groups assistance than wealthier households and would directly benefit from the new program more established businesses. For example, and whether that is consistent with the needs federal financial assistance provided to of the economy. businesses in April 2020 through the • Some Proposals Intended to Address Paycheck Protection Program flowed first to Inequities. Some of the state’s economic businesses with existing relationships with development policies target investment in banks. Less affluent communities also may areas of the state with high poverty and high be less prepared to compete for stimulus unemployment. When considering a proposal spending. For example, a community that designed to target areas for economic has spent local funds to plan for and design development, carefully scrutinizing the rules infrastructure projects in advance of external or standards used to identify these areas funding likely would be better positioned to is important. Many past programs have compete for stimulus infrastructure spending been ineffective because of overly broad or than communities that lacked funding to do ambiguous targeting. such preparation. CONSIDERATIONS SPECIFIC TO THE COVID-19 PANDEMIC In our recent report, The 2021-22 Budget: these disparities than broad-based economic California’s Fiscal Outlook, we forecast that the stimulus. At the same time, it is important to state will begin the 2021-22 fiscal year with a be mindful that disadvantaged communities one-time surplus of about $26 billion. This large might be less prepared to compete for revenue windfall provides the Legislature with an targeted stimulus. One option for targeting opportunity to mitigate the adverse economic stimulus without placing undue administrative and health consequences of the public health burdens on intended beneficiaries could be to emergency. As part of this overall response, the limit eligibility to certain geographical regions Legislature also may consider using a portion of or industrial classifications. these funds for one-time fiscal stimulus. In addition • Some Types of Economic Stimulus to the general guidance above, we suggest the Would Be Counterproductive Until Public Legislature consider several additional unique Health Emergency Resolved. Stimulating factors related to the COVID-19 pandemic. economic activity that would increase the risk of spreading COVID-19 would be • Target Most Impacted Communities and counterproductive. Stimulus targeted at Businesses. The COVID-19 pandemic and increasing tourism or large indoor gatherings, recession has disproportionately affected for example, likely would increase the negative many low-income workers; communities of health effects of the pandemic. During this color; and businesses in tourism, hospitality, time, the state might instead provide targeted and close-contact personal services financial assistance to households and industries. Directly targeting stimulus businesses that have lost income to minimize proposals to the most affected households additional adverse economic effects. Over and businesses could more effectively address time, such economic relief also provides www.lao.ca.gov 11 analysis full gutter AN LAO REPORT broader indirect economic benefits. In the • Some Increased Borrowing for Stimulus absence of federal programs, however, we Spending Could Be Reasonable. This is note that the state has relatively modest a relatively good time to finance stimulus capacity for direct financial payments to spending for major deferred maintenance affected households and businesses. and necessary infrastructure projects • Prioritize Stimulus Spending on Proposals because interest rates are at historic lows. With Public Health Co-Benefits. Public The Legislature could consider whether health programs that also have economic spending under previously authorized bonds stimulus co-benefits are particularly important can be accelerated. The state also may right now given the pandemic’s severity and borrow against special fund revenues for the close relationship between the economy some types of spending without first getting and the public health situation. The Legislature voter approval. However, policymakers could look for opportunities to increase should consider that planning and initiating funding for effective existing programs that new construction projects often is a lengthy address both needs. Examples might include process. While the long-term economic providing training in relevant public health jobs benefits from new infrastructure spending and contracting with California companies may have strong policy merit, the amount of for business services related to the state’s time needed to begin construction may be too pandemic response. long to provide meaningful economic stimulus coming out of an economic recession. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT APPENDIX Prior Evaluations of the Economic Sales Tax Exemption for Certain Manufacturers. In 2018, we evaluated the Effects of State Programs economic effects of a sales tax exemption The Legislature occasionally asks our office to administered by the California Alternative Energy evaluate the economic and fiscal effects of state and Advanced Transportation Financing Authority. programs and policies. Our research has raised This exemption is available for equipment used for issues for legislative consideration about the certain manufacturing activities such as aerospace, potential effectiveness of the state programs that electric vehicles, and alternative energy equipment. we reviewed. In addition, we have endeavored In this report, we concluded that the exemption to increase awareness about the challenges and likely has some positive economic effects on the limitations of such analyses. We highlight three targeted industries in California. Whether the recent studies below. program had positive or negative net effects on the Film and Television Production Tax Incentives. state’s economy as a whole was unclear, however. We evaluated the economic effects of an income This report, which is available online, includes an tax credit for motion picture production in 2016 appendix that discusses the economic effects at the request of the legislature. In this report, of the program in detail and explains why the we estimated that about one-third of the film and estimates of these effects are highly uncertain. television projects that received a tax credit under State Policies to Reduce Greenhouse this program would probably have been made in Gas (GHG) Emissions. Pursuant to a statutory California anyway. We found that the $800 million requirement, our office reports annually to the program may have increased the state’s economic Legislature on the economic effects of the state’s output by between $6 billion and $10 billion over statutory GHG emission goals. Our 2018 report, ten years. Our report also highlighted key areas of Assessing California’s Climate Policies: An uncertainty and additional factors the legislature Overview, provides a conceptual overview of the should consider beyond the bottom line economic potential economic effects of state GHG reduction results of the analysis—such as opportunity costs policies and explains key economic concepts and and the policy objective of the program which was the challenges in estimating the overall effects of to strategically counter aggressive film tax credits the policies. offered by other states. This report is available online. LAO PUBLICATIONS This report was prepared by Brian Weatherford, and reviewed by Brian Uhler and Caroyln Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 13 LEGISLATIVE ANALYST’S OFFICE