May 12, 2008

No State -- Well, Except Hawaii -- Is an Island

TIMES ARE TOUGH in California. The economy is in rough shape, statewide unemployment now averages 6.2 pc and has hit double digits in several locales, and the Government is facing a budget shortfall that could hit $20 billion. As a result, this has prompted the Government to take strong action to turn around the state's fortunes.

Of course, this being California, the strong action in question involves frantically looking for new ways to extract tax money from the wretched populace. Among the proposals so far are: a 25 cent tax on plastic bags; extending the 8 pc sales tax to on-line music downloads, a 30 cent tax on beer bottles (raising the price of a case by $7.20), and turning poor senior citizens into serfs in exchange for a property tax break. But perhaps the most stunningly ill-conceived idea threatening to escape the Assembly is a 25 percent gross receipts tax on all facets of the adult-entertainment industry: strip clubs, movie studios, risque stores, pay-per-view movies in hotels, you name it, it would be taxed. (A hearing on the matter is being held today).

Faced with the prospect of being shaken down by the Assembly -- the biggest pimps of all -- those in the industry are understandably panicked. Their lobbyists are warning the proposed levy is so onerous it will prompt the industry's mass exodus from the state. The Whittier Daily News, in Whittier, Calif., spoke with one of those lobbyists, who was not at all happy with the proposal:

"If you see this tax pass, I think you would see an exodus to Nevada or Oregon or some other state," said Matt Gray, a lobbyist for the Association of Club Executives, a group representing the adult entertainment industry. ...

Gray called (Assembly Bill 2914) the "most dishonest" piece of legislation he has ever seen in his life, suggesting it smears the reputation of the industry. The text of the bill suggests that adult entertainers are a blight on local communities, saying they "impact the character of neighborhoods, or curtail and prevent the development of properties in their general vicinity."

Gray estimates the industry employs about 50,000 people in the state and generates about $4 billion a year.

When Mr Gray spoke, the proposed tax was a mere eight percent of gross receipts. One can only imagine what he thinks of it now. As for me, I have to wonder what the Assembly was thinking in even allowing this miserable idea to see the light of day.

After all, let's review the facts here. Fifty thousand jobs and $4 billion in revenues. That's not exactly a drop in the bucket -- especially when one considers how much of that money comes into the state from customers who live outside California. Were the state to enact such an onerous gross receipts tax on the industry, it's fair to say most of the industry would find a more hospitable place to do business. As amazing as it might seem to Sacramento, California isn't an island unto itself -- people can and do leave as a result of decisions made there.

The obvious candidate for the industry's relocation would be Nevada, which has no corporate income tax (California's is 8 pc or so) and has built much of its economy around allowing people to do things they can't do in California. Plus, if one considers how much of that $4 billion gets spent, it conceivably would mean California enjoys an economic benefit of at least $15-$16 billion from that activity. If you take out that economic activity and the people, it will have a ripple effect that will only exacerbate California's economic problems. It won't help the housing market in the San Fernando Valley either.

Now, some may argue that I'm treating the idea far too dispassionately: after all, many people don't care much for the industry given what it does. However, the moral questions related to it -- on which I am a neutralist -- are an entirely different matter. I am interested solely in the economics of it all. Really. Honest.

As it happens, though, the economics of the industry explain why I haven't been to a strip club in seven years and have no plans to return. You see, the adult-entertainment industry is the sole business on Earth where zero-sum economics applies, and the customers are those on the losing end of its transactions. On an intellectual level, it annoys me to be on the losing end of zero-sum transactions.

Also, although I consider myself quite savvy when it comes to commercial negotiations, I also know when I'm hopelessly outclassed. This was made clear to me on my last visit to a strip club, seven years ago in Nevada. I was with a friend, who shall remain nameless, and we had gone to a club on what appeared to be a rather slow night. My friend and I each got a lap dance and being gentlemen we tipped well.

I can assure Loyal Rant Readers that not ten minutes after this, it seemed as if practically every girl in the club approached us and inquired if we would like another lap dance. I mean, it was an all-out assault on our wallets -- and it nearly worked, too. But after fending off the sixth or seventh inquiry, my friend and I looked at each other and his reaction -- "Let's get the hell out of here!" -- summed up my thoughts exactly. We got the hell out and went back to our hotel to regroup.

Perhaps ironically, this is a big reason why I think the industry will be able to escape Sacramento's clutches, at least for now -- the people in the business are so skilled at sales and marketing that they'll run circles around the legislators trying to tax them out of existence. One can only hope that in the process, they'll get some very important economic lessons across to the gang of idiots in Sacramento, because the lessons are applicable to all businesses and all sectors of the economy. Sadly, the other sectors of the economy don't have pretty girls to speak on their behalf.

Posted by Benjamin Kepple at May 12, 2008 06:42 PM | TrackBack
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