Tuesday, July 07, 2009

How Bad Is It In California?

In a state with about 37 million people, this is amazing:

Twenty-five percent of California's revenue comes from income taxes paid by the 144,000 richest taxpayers, so "if one of them leaves, it's a really bad thing." Lots have left. Some never really arrive. Pierre Omidyar, after founding eBay in San Jose, resided in Nevada, which has no income tax.

California's cascading crises prefigure America's future unless Washington reverses the growth of government subservient to organized labor. The state cannot pay its bills, poorly educates its young, and its taxation punishes whatever success that its suffocating regulatory regime does not prevent.

This is where the US is heading under President Obama and the Democrats. And what happens when the country gets there?

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap...

Meanwhile, on Monday morning, a budget meeting between Gov. Arnold Schwarzenegger and legislative leaders failed to produce a result. Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The state is issuing IOUs instead of tax refunds or payments to its creditors.

He who has eyes to see, let him see.


PeggyU said...

Did I calculate that correctly? That is 0.4% of the population pays 25% of the state's taxes? Many of them must live in Hollywood, and they must make ... a hell of a living to pick up the tab on that.

PeggyU said...

I wonder if Gray Davis is smirking about this? His spending got him canned, but he has to be relieved not to be in Schwarzenegger's shoes right about now.

sam011989 said...

unfortunately, this issue was arising before obama came to office

Darren said...

Sam, of course it's been years in the making. But President Obama seems to want to copy the mistakes we've made here in California, and even compound them with more government entitlement programs (e.g., health care).

MikeAT said...


Something akin to the CA mess. New Your City, nothing if not leftist, has an idiot mayor who finally got slapped in the face a few months ago:

Wall Street Journal, 2/19/09, http://online.wsj.com/article/SB123500384765617949.html

“Let us now praise New York Mayor Michael Bloomberg, who has learned a few things about tax rates and incentives.

New York state and city revenues are falling amid the collapse of Wall Street, and state lawmakers in Albany are considering income tax hikes for households earning between $250,000 and $1 million, who already pay 6.85% to the state. Meanwhile, the New York Post reports that City Council Speaker Christine Quinn wants to increase the city's top tax rate of 3.68% for households earning as little as $297,000 (to 4.25%); those earning $532,000 to $1.2 million would pay 4.45%; and above that 4.65%.

But late last week Mayor Bloomberg was channeling these columns when he said that raising taxes on high earners could drive them from the city. ‘One percent of the households that file in this city pay something like 50% of the taxes,’ explained the Mayor. ‘In the city, that's something like 40,000 people. If a handful left, any raise would make it revenue neutral. The question is what's fair. If 1% are paying 50% of the taxes, you want to make it even more?’ “

I remember when Arnold was just in office (before he became ALGORE with an accent) he was speaking to businessmen and asking them what would keep them in the state. Now these politicians are discovering if you tax a business out of existence, it can’t pay you any taxes. Or if you’re taxing them to unprofitability, they will simply leave to other states where they can make a living.

And these are the “smart people” among us?!

MikeAT said...

“unfortunately, this issue was arising before obama came to office”

Sam, I won’t argue that. But the definition of insanity is doing the same thing over and over and thinking you’re going to get a different outcome (Thank you Albert Einstein). The Democrats (and certain Republicans) are spending everything they can thinking (or actually just saying) it won’t lead to bankruptcy.

muckdog said...

For the most part, Arnold has disappointed me. But finaly, he is doing the right thing and trying to cut spending. Listening to Steinberg and Bass whine and complain is amusing, too.

allen (in Michigan) said...

Arnie can try to cut spending but he's wounded himself politically pretty severely and whether he can come back from the multiple, self-inflicted injuries is not at all certain. Of course that does leave open the question of how much further California can descend.

Steve USMA '85 said...

I know Virginia is all excited about Hilton Hotels moving their corporate headquarters from Beverly Hills to Fairfax. The main reason cited by both the company and independent sources was the significant savings by operating in VA versus CA.

Anonymous said...

I'd be a lot more upset with Arnold if the voters of California had not *clearly* voted in 2005 for unconstrained spending (prop 76). 62% to 38%.

So ... with a chance to keep spending reasonable, the California taxpayers were quite clear: No, please keep spending recklessly.

Which makes it very hard for me to blame either Arnold *or* the state legislature. Both have been doing exactly what the voters have wanted them to do.

I'm reminded of Mencken: "Democracy is the theory that the common people know what they want and deserve to get it good and hard."

-Mark Roulo

Darren said...

Scare tactics.

Yes, Californians often vote with their heart instead of their head--$6B in stem cell research and $10b for a bullet train are two recent examples. But that doesn't let the legislature and governor off the hook for runaway entitlement spending, increased taxes, and what is demonstrably the most business-unfriendly regulatory climate in the country.

Anonymous said...

What are scare tactics?

-Mark Roulo

Ellen K said...

What are California's options? They have a legislature that is fearful of saying no to any spending program and voters who seem to think someone else is going to pay for their programs. Corporations, as I have said before, are not alive. They sustain on profit and create jobs on profit. Take away the profit and the corporation vanishes. In order to avoid that businesses are going out the door fast-some to other states and some to other countries. But at the same time, LA has a multimillion dollar funeral for a pop star and thinks somebody else will pony up. It's oddly sad that the media thought a million people would be in the streets of LA, while only an estimated 50,000 showed up. Doesn't it make you wonder if the media hypes programs that appear to be politically popular, but which nobody would miss if they were gone?

Anonymous said...

People value what they pay for, and the fact is, here in CA, and elsewhere, there are a lot of people who are getting something without paying for it.

Individually, what they are getting may not qualify as largesse, but collectively, it does.

The Tax Foundation did a study a few years back which mainly looked at benefits received vs. taxes paid. A partial title: "WHO PAYS TAXES AND WHO RECEIVES GOVERNMENT SPENDING?" The authors were Chamberlain and Prante.

This study found that the bottom 20% of households (in terms of taxes paid) received around $8 in local/state/federal benefits for every $1 they paid in taxes. At the other end of the spectrum, the top 20% of households (in terms of taxes paid) received about $0.40 of local/state/federal benefits for every $1 they paid in taxes.

How much longer can this be sustained?

Anonymous said...

Here's a relevant addendum

maxutils said...

Darren, I'd argue that it pretty much does let the legislature off the hook -- discretionary spending is only something like 20% of the budget. The rest gets sent out, and Prop 98 ensures that schools get about half of all revenues collected, whether or not they need it. That's all voter fueled.