The Bear State

The 8th largest economy in the world in 2005 according to the CCSCE , responsible for 13% of the United States GDP, the world’s fifth largest supplier of food and agriculture commodities, home to the aviation and entertainment industry and 21% of the U.S. oil reserves, is the Bear Flag Republic of California. With all these advantages and resources how is California on the brink of bankruptcy. To understand this you must review California’s state taxes, gargantuan spending habits, and inept politicians.

California’s income and sales tax is the highest in the nation. The income tax is 10.55% while sales tax increased to 9% this past April. Many businesses as well as residents are fleeing the state to California’s tax friendly neighbors, Nevada and Arizona, even Oregon’s tax look minuscule when compared. The chart on the right graphs in percentage the amount taxed or taken from a single individual that earns $1 million a year. From 2000 to 2007 California has lost 1.2 million residents to domestic migration, or migration within the states. That is approximately the city of San Diego moving to Nevada or Arizona. In that same time period California has grown 7.5% or 2 million new legal immigrants. With California’s high tax rate they are taxing the established residents right out of the state, who most likely contribute more to the state coffers, than the 2 million new immigrants.

California current budget deficit is $21.3 billion down from $33.9 billion earlier this year. California has always had budget problems. In 1991, Gov. Pete Wilson faced a $14.4 billion deficit, and in 2003 Gov. Grey Davis received a special election to be kicked out of office because of a $35 billion deficit. Then came Arnold and his $21.3 billion deficit. California deficits seem to come and go with recessions, with surpluses coming in good economic times. However the surpluses always seem minute compared to the deficits. To close the deficit politicians in Sacramento, have resorted to budget cuts and accounting gimmicks, then asked Californians to vote for a tax hike. It wasn’t well received as you might imagine. The most recent attempt, voted on last Tuesday May 19th, was Proposition 1A,B, C, D, E, and F. All but Prop 1F failed. Prop 1A was for California to set up a rainy day fund, except it allowed state legislature to raid rainy day funds when need. Prop 1B allowed $9.3 billion from the rainy day fund to be diverted to education. How much do they think this rainy day fund will have? Prop 1C,D, and E allowed the state to raid trust funds and use surpluses to pay current general fund bills, this went over really well as you might imagine. The only proposition to pass was 1F, which blocked pay raises for lawmakers if they failed to balance the budget, finally maybe some accountability. I wonder if Washington is watching? Decidedly not with another $50 billion marked for Grand Misappropriation…whoops I mean GM. With these measures voted down by CA residents the govenator is turning to new and creative ways to reduce the budget gap.

The state’s current plan calls for major cuts to education, health care and borrowing from the municipal governments. This will however only get CA a third of the way there, maybe halfway if the cuts are large enough. The other half or so will come from bonds, elimination of the Cal grants, and loans from Wall Street, according to Arnold. You are thinking who is going to buy CA bonds? Arnold was recently in Washington lobbying the feds to back California’s next $6 billion bond issuance. A loan from Wall Street may come at too much of a price, resulting in a federal bailout. Can the American people stomach another bailout? If Obama wills it. The last ditch effort calls for selling state infrastructure such as fair grounds and racetracks. My personal favorite is selling the LA Coliseum for $400 million, last appraised in 2001 at $16 million and depreciating. So how does California become Golden once again?

The first step is for California to stop paying for local education. The state currently pays for education from its general budget unlike other states that use local property taxes. Proposition 13 was passed in 1978 placing strict limits on property taxes with those taxes going to local communities. When the proposition passed it reduced property taxes by 57% on average statewide. With the repeal of Prop 13 California could obtain enormous amounts of funding for its school districts and cut primary and secondary education entirely from the budget leaving only higher education. California’s currently spends about 52 to 55 percent of the State General Fund Budget is spent on K-12 and Higher Education. The state can also cut teacher’s salaries and benefits, which currently rank 35% above the national average. But with the Teachers Union running the show in Sacramento it is doubtful that would happen, unless by federal mandate. Until then Sacramento’s best bet is to break into the U.S. mint in San Francisco and print their own money.