California, a Failed State

California is facing economic failure resulting from years of a liberal legislature pursuing a liberal version of utopia.  The liberal utopia has become the Forgotten Man's hell.  California has been at the forefront of many trends in America including a tax revolt that led to Proposition 13. Is it time for a repeat?

Californians have just given the raspberry to the state's legislature's plan to fix the current budget deficit. Had the initiatives passed, California would only be under water by $15B as opposed to the current $21B, and that number is sure to rise as unemployment in the state rises. The plan was inadequate and the 22% of the voters who saw fit to vote saw through the charade of the ballot initiatives for what they were -- which was a band aid to cover the twin cancers of structural tax deficiencies and partisan politics masquerading as thoughtful dialog.

The Golden State has lost its luster. California ranks 48th out of 50 in business tax climate according to the Tax Foundation. Only the beacons of limited government found in New York and New Jersey scored lower than California. The states bordering California scored much better in terms of business climate.

  • - Oregon - ranked 9th
  • - Nevada - ranked 3rd
  • - Arizona - ranked 21st
From a personal tax level, the tax burden for individuals as measured as personal income tax income per capita, California ranks 6th according to the Tax Foundation. Again, we can look at the neighboring states. The lower the ranking, the higher the income tax burden.

  • - Oregon - ranked 9th
  • - Nevada - no personal income tax.
  • - Arizona - ranked 39th
Capital and jobs are mobile and will seek the best returns. California receives 50% of its personal income tax revenue from 1% of the tax filers.  Businesses are not expanding in California -- or they are leaving the state. The good news for Nevada is that there is growth in jobs due to the friendly business climate. The bad news for Nevada is that Californians are migrating to Nevada to seek a better future. There goes the neighborhood.

The good news for California with regard to tax burden is that thanks to Proposition 13, the per capita property tax burden ranks California 28th.

California's budget for K-12 education was 42.1B in 2007/2008 up  from the 2002/2203 budget of $28.8B. This is an increase of 46% during the period of time that inflation as measured by the CPI grew by 12.7%. During the period from 2002 to 2005 (sorry, the CA Dept of Education has not posted K-12 statistics more recently than 2005), the California K-12 population has risen 1%. If the increased education spending were limited to inflation + increase in student population, over $8B could have been saved. 

California is controlled by unions, specifically the CTA (California Teachers Assoc.), and the California state employee unions, who have a willing Democrat- controlled legislature in their pockets and demand more money. Just as the unions have broken the auto industry, the unions in California are breaking the state. California has made the same decisions to placate the unions as GM and Chrysler did, and we know how that story ends. Could a bailout of California be far behind?

The people of California have spoken, and we shall see if the Governator and the miscreants in the state house get the message.

Below is an outline of how to address the state's budget problem.

  • Reduce the sensitivity of the personal income taxes to economic conditions. This requires making the tax less progressive, and more broad based. This means no earner is exempted from income tax. Every citizen of the state needs to be a stakeholder in the state's financial well-being.
  • Incentives should be given for reduced tax burden on returns of capital. The economically freest place in the world is Hong Kong, and it has no capital gains tax. Eliminating taxes on capital would help create jobs in California.
  • Go to a zero based budget with 2002 as the base year. Spending should be limited to inflation + population growth relative to the base year.
  • Eliminate social benefits for illegal immigrants and allow illegal immigrants residing in the state to self-deport as the gravy train ends.
  • Eliminate defined-benefit retirement benefits for state employees and move solely to defined-contribution plans.
  • Redistrict all legislative districts to eliminate ‘safe' districts.
California must move away from its entitlement mentality and liberal orthodoxy in order to fix the budget. California can do the country a service and serve as the spark to start the revolt against flagrant spending.
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