But is ain't a good thing...From the WSJ 12/28/2007
The Red Ink State
December 28, 2007; Page A12
In the contest to be America's most spendthrift state, New York and California are typically ahead of the pack. But here comes the not-so-Golden State charging back in the lead. Last week Governor Arnold Schwarzenegger announced he will declare a "fiscal emergency" in January, which he said has become "a common thing in California." No kidding. This budget crisis comes a mere five years after the last one.
The bean counters in Sacramento are now projecting the state's budget deficit at $14 billion, and climbing. That's a big enough hole that if the state were to slash 10% from every public service -- from schools, to courts, to highway patrol units -- it would still be $2 billion in the red. There are lessons for other states in these recurring budget miseries, in case anyone still thinks California is a model to follow.
Let's start with the culture of overspending in Sacramento. State outlays have nearly tripled to $142 billion this year from $51 billion in the early 1990s. After the technology bubble burst in 2001, the state's deficit swelled to $20 billion. Voters recalled Gray Davis from the Governor's mansion in favor of Mr. Schwarzenegger, who promised to "cut up the state's credit card." In Arnold's first year, the budget was held in check, but the state still issued $9 billion in "revenue bonds" rather than shrink the size of government.
What really rescued the state was the national economic expansion, including the housing boom and the cut in capital gains and dividend taxes that helped the state's technology industry. Tax receipts rose 40% over the last four years, but Sacramento returned to spending as usual. Expenditures rose by 44%, and billions of dollars of new school and road bonds were issued. After getting trounced by labor unions in state referendums, Mr. Schwarzenegger gave up trying to change any of this.
Even with the new deficit estimates, the Governor and legislature are promoting a new government health-care plan at a cost, coincidentally, of $14 billion. The state Assembly recently passed the plan. State Senate President Don Perata, a Democrat, advises that to launch this new health-care entitlement now would be both "impractical and impolitic." He's right, but the politicians are floating a $2 a pack increase in the state's cigarette tax to pay for it. So a shrinking number of smokers would be tapped to finance a growing number of citizens dependent on the state for health insurance.
One reason for the budget deterioration is falling home prices. The housing bubble sent the median home price to $500,000 last year in California. At the height of this real-estate euphoria, fewer than one in 20 residents could afford to buy the average home in San Diego and Los Angeles Counties. Now the state is enduring the inevitable correction, with prices tumbling by double digits in some markets. Homeowners are demanding a revision of their property tax assessments, which is only adding to the revenue drought.
California is also losing many of its most productive workers. Over the past decade nearly 1.5 million more Americans fled California than arrived; 275,000 left last year alone, according to Census Bureau data. An influx of foreign immigrants has maintained the state's overall population, but those departing include upwardly mobile middle-class families moving to lower-tax states with more affordable housing.
All of this circles back to the policy mess in Sacramento, especially to its steeply progressive income tax that encourages budget boom and bust. The Golden State applies a top marginal income tax rate of 10.3%, the highest rate on earnings of any state (excluding some city levies, such as New York City), according to the Tax Foundation. A rising share of those who pay the 10.3% rate are now hit by the federal Alternative Minimum Tax, so about one-third of California's income tax is no longer deductible from federal tax liability. This is one more reason for taxpayers to flee the state. The progressive tax structure also places the state revenue burden on the backs of relatively few taxpayers. In good times this inflates revenues, which the legislature then spends with abandon, only to see those revenues vanish when the economy slows.
"Our tax policies practically invite Californians to pack up their bags and leave the state," says Assembly Minority Leader Mike Villines. "We can't possibly balance our budget with new taxes." Ah, but Democrats are willing to give it a try. Assembly Speaker Fabian Núñez wants to institute a new tax on Internet sales, increase corporate taxes, and double the state's hated car registration tax.
Mr. Schwarzenegger is again preaching spending restraint, which is long overdue. The tragedy is that he and his Sacramento running mates wouldn't be facing this current fiscal mess had they done more to improve the state's policies during the last one.