We’ve been hearing a lot lately about California’s return to fiscal solvency thanks to a round of tax hikes; the ‘one percent’ of Californians are, we have been told, happy to pay their fair share and to participate in the rescue of the Golden State.That’s what the politicians say; some of the actual taxpayers dissent. As Robert Cristiano laments over at the New Geography website (h/t @kausmickey), when the new taxes, the old taxes and the ever-increasing regulatory barrage all come together, life in California loses its charm.
What is my fair share? Under existing Federal and State income tax rates, I will pay 50% of my income in taxes. In California alone, my “fair share” on a million dollars of income is $133,000 each year. In exchange for my taxes, I receive little from the state. In addition, I pay gasoline taxes that pay for the upkeep of the highways. I pay airline taxes that maintain the airports I use. I pay among the highest in the nation sales tax on what I consume. I pay property taxes for the schools my grown children no longer use (they have already left California). I pay utility taxes for the upgrade of infrastructure. I pay higher health insurance rates. I already pay more than my own way.I used to develop new homes in California and paid development fees, school fees, park fees, bridge & thoroughfare fees, endangered species fees, utility hook up fees, and processing fees to employ the city workers who reviewed my plans. Such fees totaled $40,000 to $75,000 for each new home built in California. I more than paid my own way. Such new homes are no longer feasible in California considering that home prices have fallen between 20-40% since 2008. And with the new regulations to be imposed in 2013 with the passage of the Global Warming Solutions Act of 2006, housing and energy will cost even more making new houses even less attractive than they are now.
Mr. Cristiano’s problem is that he is a target for all three pillars of California’s progressive coalition. To the Democrats who represent lower income people and to those who represent state and city workers, he is a source of revenue to be milked. To the anti-development greens, he is an enemy to be destroyed—the human equivalent of crabgrass. People who become rich by developing suburban housing tracts were the heroes of post World War Two California; for progressives they have become villains who get rich by destroying the earth.If he made movies or computer software, Mr. Cristiano would only be sheared; that is, California’s blue coalition would treat him like a sheep, stripping him of wool but otherwise leaving him to go about his business. But because he makes real stuff, they treat him like a mink: they want the whole pelt. In the same way they go after construction, California’s greens heavily tax and regulate manufacturing—again, a mainstay of the post World War Two boom in the state.The conceptual one percenters in California (Hollywood and Silicon Valley) may well stick around. They can—and do—outsource increasing amounts of their production to escape the state’s cost structure, but an increase in state income taxes is more like a mosquito bite than a visit from Count Dracula for information tycoons in both places. But for one percenters whose wealth is based on production and construction in the state itself, the picture is much darker. As Cristiano puts it:
“So many of the 1% are quietly leaving. The exodus has already begun. Spectrum Location Solutions reported that 254 companies left California in 2011. Despite claims of an upturn, a press release by the State Controller’s office last week revealed tax revenues from both personal income taxes and corporate taxes fell during the month of this November. Revenue from personal income dropped 19 percent below projections while corporate tax revenue was down a whopping 213.4 percent. Such declines will continue unabated for years to come as the California brain drain proceeds.”
It’s unclear what Governor Jerry Brown and his fellow policy-makers are thinking. California is the sixth most expensive state to live in, with a top individual tax rate that is the second highest in the nation. One would think that with all this incoming revenue the state’s public services would be sparkling with quality, yet the opposite is true. California public schools rate as some of the most expensive and poorest performing in the country. In 2011 the Supreme Court ordered that California release 30,000 inmates, deeming the prisons so overcrowded that their conditions qualify as “cruel and unusual punishment.” This shocking move reflects two vital points. First, that with all its wealth, California doesn’t have the funds necessary to build more prisons. Second, that the state is producing too many prisoners—another failure of California civil institutions. Even with its enormous taxes and public institutions that show no sign of benefiting from them, the Golden State still boasts one of the largest budget deficits in the nation.As regular readers know, Via Meadia doesn’t have a lot of confidence in California’s political and economic management. The confluence of union power with a green hatred of construction forces the state into such cockamamie boondoggles as a $60 billion plus high speed rail. (Unions want jobs, but greens block any kind of construction that doesn’t fit their vision of a low carbon economy.) Call it a turquoise governing philosophy: the mix of green and blue that wants to carry forward 20th century policies like a large civil service and a mass welfare state even as it manages the shift to a post-industrial, low carbon economy.This strategic vision blends the priorities of three constituencies that are essential for the contemporary Democratic Party in California: rich greens (strong in Hollywood and Silicon Valley), public sector unions (vital statewide political organizations that Democratic candidates can’t win without), and low income Californians (a growing number) who depend on public services.This is the coalition that nationally the Democratic Party is increasingly coming to resemble as well. The danger to the state and the country is that while this can be a short term majority coalition, it leads to incoherent policy that in the end frustrates at least one of the groups and crimps growth overall.In California, the bulk of the sacrifices are falling on the low income people who need state and local government services. First, because the green-driven opposition to everything from real estate development to manufacturing kills the blue collar jobs that would facilitate the rise of immigrants and other low income Californians into the middle class. Second, because in order to preserve the position of union workers and retirees, the public sector is so expensive and unwieldy that the interests of consumers of government services are systematically sacrificed in the interests of the producers. Bad schools, tenured teachers. Crowded prisons, happy guards. Cities and counties cutting back on necessary services from trash collection to law enforcement; civil servants doing well.Via Meadia‘s quarrel with California isn’t really about the goal. We are as turquoise as Jerry Brown in our own way: we think that a low carbon, post-industrial economy can ultimately provide an abundance that will help everyone. When the turquoise tide rolls in, it really will lift all the boats in the harbor.But how do you get from Point A to Point B? The California path seems unrealistic in two ways. In the first place, it insists on trying to do all this with the methods and cost structure of the Prussian bureaucratic government model. A big, low-productivity, life-tenured civil service workforce cannot meet the needs of the 21st century, and the more you want this kind of government to do, the less will it will do it and the more it will cost.Then, partly to raise the revenue for this outsized and unwieldy behemoth, California is both crushing the old economy before the new one is really ready to take its place and it is inhibiting the growth of the new service oriented businesses that could provide jobs for its army of unemployed and unskilled workers. The transition between a manufacturing economy and an information one is going to be tough, especially on blue collar and unskilled workers. California hasn’t really thought through the problem of transitional employment and in California’s case the high local population of unskilled immigrants makes the issue more urgent. California needs to be encouraging manufacturing and real estate development rather than squashing them, and it needs to develop tax, regulatory and zoning policies that favor small business start ups rather than entangling them in red tape.California and its governor are right to be hopeful about the future. They are right to believe that the 21st century can offer people at all income levels a richer, more dignified life than was ever seen in the past. But the interlocking requirements of their governing coalition lock them into a set of policies that doom them to frustration.It’s easy for those who worry about the future of America’s most important state (the biggest population, the largest economy, the leader in both the information and entertainment industries) to blame a bunch of misguided Democrats for the state’s predicament. There is some truth to that, but it would be very wrong to let the GOP off the hook. If the governing party is making such a mess, why hasn’t the opposition been able to come up with a coherent and popular counter-plan?California’s failure is the result of failures of leadership on both sides of the aisle. The GOP needs to study its long running decline and current collapse in California if it is to have any hope of being relevant long term across the country. California is a few years ahead of America as a whole; those who think it is on the wrong road need to think very hard about what is happening and why, because unless something changes, this is where we could all be headed in the not so distant future.