The Tax and Spend Spectator

Our Very Own Greece

The major difference is that California has an even bigger budget deficit than its Balkan cousin.

By 5.17.12

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Stock, commodity, and currency markets have been on a roller-coaster ride in recent days as Greece's election results leave that nation without a functioning government, and without a clear path toward staying in the euro currency.

The right answer, albeit a very painful one, may be for Greece to take their medicine and leave the euro, and for Europe to stop bailing out a dysfunctional country that can never be competitive without a less expensive currency. Wednesday marked an all-time low in the Greek stock market.

More important, however, and where few Americans seem to be looking, is our very own Greece: California. Since California doesn't have the option of seceding from the union, one wonders when the state will ask the IMF for a Greek-style bailout.

California's economy, with a Gross State Product of about $1.9 trillion, is more than six times the size of Greece's. At $90 billion, the state's budget (excluding the few hundred billion dollars of federal money distributed there) is only sixty percent of the size of Greece's national budget. But, California's budget deficit, estimated at $16 billion for the current fiscal year unless substantial changes are made, represents a stunning 17.5 percent shortfall and a huge miss from January predictions of a $9.2 billion deficit. Greece is now anticipating a deficit under 7 percent of GDP, but even allowing for typical politician optimism, the Greek deficit problem is arguably small compared to California's.

While both places are full of union members and socialists (pardon my redundancy) focused on preventing cuts in government spending, California does have one advantage: it is not full of people who make a full-time job of tax evasion as is the case in Greece. According to a fascinating article on the subject, "the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country's budget deficit."

California Governor Jerry Brown is proposing certain spending cuts (including cuts to higher education and to programs for the poor) and tax increases (a massive income tax rate hike -- from 10.3 percent to 13.3 percent on those earning over $250,000 -- and a 0.25 cent increase in the state's sales tax.) Even so, his budget calls for a more than 5 percent increase in state spending, including a 16 percent increase to public school spending, over the prior fiscal year, giving a new meaning to "austerity" and emphasizing the power of teachers unions over Democrats.

California, like Greece, and most western nations' governments, has a spending problem, not a revenue problem. One example: The state has one eighth of the nation's population but one third of its welfare recipients -- in part because, according to Business Week, "it is one of the few states that continue to provide welfare checks for children once their parents are no longer eligible."

Brown is taking the tax hike part of his plan directly to voters, using the typical Democrat threat of cuts to public education if the hikes are not passed. It's time to call his bluff, at least if California wants to stop hemorrhaging people, jobs, and talent.

In a Wall Street Journal op-ed last month, demographer Joel Kotkin discussed "The Great California Exodus": "Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving…. [M]ost of those leaving are between the ages of 5 and 14 or 34 to 45." (California's population has grown in the past twenty years, but the growth is due entirely to the arrival of immigrants and the birth of children.)

One reason for the mass departure of the Golden State's American-born adults who are entering the prime of their working (and tax-paying) ages is the state's cap-and-trade law and other regulations that raise energy prices: Electricity prices in California are about 50 percent higher than the national average, although nine states have even higher prices. This, along with bubblicious real estate prices, made California the most expensive of the 48 contiguous United States in a 2011 CNBC cost-of-living analysis. Only one of the contiguous 48, New York, has a higher cost of doing business, and no state in the nation ranks worse than California in "business friendliness."

But perhaps the key factor in California's dwindling population of productive citizens is taxes: The current top state income tax bracket is the second highest in the nation (behind Hawaii, which is somewhat harder to move away from), and Brown wants to give it the dubious honor of taking the lead in that category.

What's arguably worse is that California's tax rates brutalize the middle class: Individuals making between $37,005 and $46,766 pay an 8 percent state income tax. Only six states and the District of Columbia have a maximum tax rate higher than 8 percent, but that is the burden on someone making only $40,000 in California -- a place where $40,000 doesn't go very far towards ordinary costs of living.

And from $46,766 to $1,000,000 of income, the California state tax rate is 9.3 percent. Only two states, Hawaii and Oregon, have tax rates higher than that paid by someone earning $50,000 in California: Oregon's 9.9 percent rate kicks in at $125,000 of income and in Hawaii a 10 percent rate starts at 175,000 of income with an 11 percent success penalty (no, it's not officially called that) above $300,000.

California doesn't just soak the rich; is an equal-opportunity pillager. And this is why it is losing the productive part of its population at a stunning pace. Yet Jerry Brown seems not to recognize that his prescribed medicine is the very poison decimating his state.

The bad-government-caused brain drain has a parallel in Europe: Reuters reported earlier this week that buyers from Greece and Spain are scooping up London real estate. A quote from a Cypriot living in London is straight to the point: "Greece is screwed, there are no jobs and it has been run by crooks." One might suggest that California is screwed, there are no jobs, and it has been run by Democrats -- and one notable Republican who behaved like a Democrat, perhaps to the great chagrin of Austrian economists everywhere.

At 11 percent, California has the third highest unemployment rate in the nation, behind only Nevada (12 percent) and Rhode Island (11.1 percent). The budget is a mess, and Governor Brown is proposing to address the problem with a method -- raising taxes -- that has already been tried and failed (unlike in New Jersey, where Republican Governor Chris Christie has balanced its budget without raising taxes). As the Wall Street Journal noted, California's tax receipts are more than 20 percent below prior projections while "state tax collections were up nationally by 8.9% last year…and this year revenues are up by double digits in many states." It's no wonder the Navajo Nation has a higher bond rating than the once-great state of California.

So JPMorgan makes a $2 billion mistake -- less than 7 percent of their 2011 earnings -- with their own money, and senators are calling for hearings. The California's governor's office raised its 2012 budget deficit projections -- namely their overspending of public money -- almost 50 percent, from $9.2 billion to $16 billion, an error of almost eight percent of the state's total budget, in four months, yet those same members of Congress remain as silent as a Trappist monk.

The California budget mess is playing out in the news today. It will be a difficult fight for economic rationality in a state that has largely accepted, to quote Arthur Brooks, European-style "learned helplessness" instead of the historically American goal of "earned success."

If you enjoy this movie, take heart, there will soon be a sequel: Illinois' state budget website says that "Illinois faces a budget shortfall of more than $11 billion… Spending growth consistently exceeds revenue growth [and it is] getting worse each year."

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About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver's NewsRadio 850 KOA on Saturday mornings from 6 AM to 9 AM. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.