A Cautionary Tale

California, not so long ago the flagship of the American federation, has been going under for quite a while now: overfreighted with lavish entitlements, embarnacled with suffocating regulation, and holed below the waterline by demographic disintegration. Because attacking the root of the problem by reducing the expansion of government is for deep-blue California an ideological impossibility, the Golden State, its gunwales now awash, has sought to stay afloat by the only means its ruling class can imagine: siphoning even more wealth from the dwindling few who still produce any of it.

As sensible men like Thomas Sowell and Arthur Laffer have reminded us for years, however, raising taxes quickly reaches a point of diminishing returns.

Well, lo and behold: as more and more of its productive citizens and corporations abandon ship, California’s returns have done exactly that — diminished.

What’s that, America? Oh, right. Nothing to see here. Yes, we’ll move along.

18 Comments

  1. the one eyed man says

    Except none of that is true.

    The nine words in the title of the cited article contain two lies (or, to be charitable, two misstatements of fact).

    California tax revenue did not “continue to drop.” Quite the opposite: California tax revenue is increasing, due to a rapidly strengthening economy.

    While the article cannot claim that tax receipts fell on an absolute basis – because they didn’t – the writer elides the distinction between declining tax revenue and tax revenue which falls short of projections, confusing his gullible readers into thinking that taxes not only are dropping, but are “continuing to drop”.

    The author neglects to mention that October tax receipts were above projections, or that tax revenue is highly volatile on a month-to-month basis. The shortfall is largely attributable to less revenue from the Facebook IPO than estimated. (It’s worth pointing out that Facebook, which is the fastest growing company in history, is about five miles away from Google, which previously held that honor. Within a ten mile radius is Apple, the most valuable company on the planet, as well Cisco, Intel, HP, and Oracle, which are the top-ranked companies in routers/telecom, semis, PC’s, and enterprise software. To the South, Hollywood had its best year ever, and to the East, the ag business has done the same. So I am scratching my head to figure out how all this wealth is being created by a “diminishing few.”)

    The second lie is that this is “despite tax hikes.” The tax hikes were approved by the voters on November 6, and have not gone into effect yet. I’m also scratching my head as to how tax increases which don’t kick in until next year reduced November’s tax revenue.

    (To be precise: the tax is retroactive to the current tax year, but withholding does not change until January. This means that December will be a monster month for tax revenue, because taxpayers will prepay the retroactive tax to get the deduction on their federal return, and tax revenues will continue to be elevated for the seven year period of the increases.)

    If the right wing blog which you cited had the least interest in reporting the facts, they would go like this: for eight years, a Republican governor had enough Republican votes in the state house to block tax increases, and used financial prestidigitation to cook the books. In 2010, a Democratic governor was elected, and in 2012 Republican legislators were routed and lost the one third of seats required to block fiscal legislation. State services have been cut drastically, and taxes have been raised, and we are back on the path to fiscal rectitude. We should have a budget surplus in 2013.

    Conservatives love to talk about fiscal responsibility, except they never actually get around to doing it when they hold the levers of power, as the last three Republican Presidents have demonstrated. Leave it to Governor Moonbeam to make the tough choices to bring California’s fiscal house in order. A well-reasoned essay would have made that point – the cited article turns facts upside down to make a facile argument which is aligned with doctrinal conservative thinking but untethered to reality.

    Posted January 5, 2013 at 11:02 pm | Permalink
  2. Malcolm says

    For example:

    Personal income tax revenues to the General Fund were $827 million below the month’s forecast of $4.387 billion. Withholding receipts were $869 million below the estimate of $4.437 billion due primarily to the revenues from the vesting of Facebook restricted stock units occurring one month earlier than expected. Other receipts were $59 million lower than the projected level of $468 million. Refunds issued in November were $104 million below the anticipated $457 million.

    …Corporation tax revenues were $175 million below the month’s estimate of $88 million…Year-to-date revenues are $441 million below estimate.

    Budgets are always built on revenue forecasts. Some are more realistic than others, though. (If you’re counting on a Facebook IPO to pay for your next solar-powered high-speed rail boondoggle, you might as well be buying scratch-off Lottery tickets.)

    People realize that in a place like California budget shortfalls equal even more tax hikes down the road. And they don’t wait around. California is rapidly shedding individuals and corporations, and mostly they are departing for more business-friendly places with lower income taxes and less-overstressed infrastructure. See, for example, this detailed study.

    California has the nation’s biggest budget deficit. (It grew from $9.2 billion to $15.7 billion just between January and May of last year — and unlike the Federal government, California can’t just go mint trillion-dollar coins.) It has one of the nation’s highest unemployment rates, the highest gas taxes and prices, obese public-sector unions, and about a third of the nation’s welfare recipients.

    City after California city has declared bankruptcy or fiscal emergency. Productive use of California’s fabulous natural resources is obstructed by onerous regulation. And because the state governs itself by the worst sort of populist democracy — lurching from proposition to proposition — the more successful, envied by all, are always right in the crosshairs. California already had one of the highest top tax rates in the country, and with Prop 30, now it’s even higher. Well-off people simply won’t stick around to have their pockets picked, nor will corporations that can get a far better deal elsewhere.

    The problem, as in America generally, is that the middle class wants to drink champagne on a beer budget. They want lavish services and a government guarantee against all of life’s vicissitudes, but they refuse to pay for it. And if giving the people an open bar and free buffet on borrowed money is what gets their politicians re-elected, then that’s what they’ll give ‘em — until, as everything that cannot go on forever must do, the whole racket grinds to a rather unpleasant stop.

    Posted January 6, 2013 at 12:31 am | Permalink
  3. Malcolm says

    But if you say everything’s hunky-dory, then I’ll take your word for it. Just to be sociable, you understand.

    Posted January 6, 2013 at 12:58 am | Permalink
  4. the one eyed man says

    It’s all a matter of choice.

    Thirty years ago, you could stand on Mulholland Drive and look down on the LA basin, which was invariably covered with a thick brown haze. Today there are twice as many people, but no haze. This is because of regulation. California set strict standards on the effluvia from factories, raised fuel efficiency standards for cars, and required additives to gasoline (which is why it is more expensive here). After an oil spill in Santa Barbara, offshore drilling was curtailed. The state made a deliberate shift to a non-polluting economy, led by entertainment, tech, ag, finance, and tourism, and jettisoned manufacturing businesses. In the choice between economic adversity and environmental adversity, we gave supremacy to the environment.

    About the same time, seniors were being forced out of their homes because of steadily increasing real estate taxes, so Prop 13 was chosen to freeze property tax at the purchase price level. The unintended consequence was that the state and municipalities lost the predictability of ad valorem taxes, and became levered to income tax. Seven years of fat would alternate with seven years of lean. The parlous state of cities like Stockton and Vallejo is largely due to the effects of the 2008 economic collapse.

    An ongoing choice is how much government you want. California has the country’s best university system, lots of parks, and a decent safety net.

    Other states make other choices. Pennsylvania may enjoy the economic benefit of fracking, but will rue it if its aquifer gets poisoned. Kentucky loves its coal mines, but the lung diseases which go along with it: not so much. Having air one can breathe and mountains which are not scarred by strip mining are two benefits of “onerous regulation” which obstructs the “productive use of California’s fabulous natural resources.” Another benefit is that tourists will continue to visit Disneyland, and their drive on Route 1 from San Francisco to Ventura will be as awesome as it ever was.

    Texas has low taxes, but as a result it leads the nation in infant mortality, uninsured kids, high school dropout rates, low wages, and so forth. That’s what unavoidably goes along with “business-friendly places with lower income taxes.” If a Californian chooses to abandon the young and the vulnerable so middle- and upper-income households pay lower taxes, then he is free to go East until smelling it, and South until stepping in it. Zei gezunt. So while you may view California as dystopian – while the untaxed, unregulated, free men living in gated communities in Dallas enjoy heaven on Earth – we made our bed and are happy to sleep in the wet spot.

    However, your last paragraph is incorrect, as there is no open bar or free buffet here. Prop 30 was remarkable not just because it combined progressive taxes (rich-soaking marginal tax rates) aith regressive taxes (increased sales tax), but because it is the only instance I can think of where a state voted by majority rule to tax itself to the point where revenue covers the services which are provided. There’s nothing wrong with big government, provided the people are willing to pay for it. That’s the choice we made in the Golden State. It would be nice if the other 49 states could catch up.

    Posted January 6, 2013 at 12:44 pm | Permalink
  5. Golden State Blues says

    It never ceases to amaze what left wingers consider to be choices “we” make. This line of reasoning always brings me back to grade school election promises of soda in the water fountain. No – the truth is that CA is heading for a fall and while I used to be bullish about the possibility that a new boom in a yet unrealized industry could make up for years of callous overspending, that likelihood diminishes with the exodus of the most productive few – the following article is instructional: http://www.mercurynews.com/opinion/ci_21858789/bob-marcus-tax-increases-will-kill-job-creation

    Posted January 6, 2013 at 5:04 pm | Permalink
  6. It’s all a matter of arrogance.

    Thirty years ago, San Francisco was virtually everyone’s favorite city. Today, San Francisco is a dump, with minute oases of real estate that nobody can afford to buy, sell, or even rent. Homeless psychopaths huddle in every available doorway, so an evening walk through any neighborhood is more dangerous than traversing New York’s Central Park at night. And if you want to partake in such pleasures for a long weekend, but are reluctant to return home with bedbugs yearning for greener pastures, it’ll cost you the better part of a grand for the privilege.

    But the obnoxious left always has the same response to anyone who has the temerity to question the policies that brought about such dismal circumstances, in what was once a beautiful city by the bay. It’s always, “We haven’t given it enough time and/or money. Moreover, this time it’s going to turn out differently.” Yeah; fur shur, dude. Gnarly.

    Posted January 6, 2013 at 9:48 pm | Permalink
  7. Malcolm says

    Peter, are you familiar with the meaning of “bullshit”? It’s different from “lying”; lying involves saying things that you know to be false. Bullshitting, on the other hand, is when you just make stuff up without even bothering about truth or falsehood; it just sounds good, so you say it.

    Permit me, then, a few corrections:

    – Texas actually leads California in average wages.

    – Texas also leads California in high-school graduation rates.

    – Texas isn’t even in the upper half of state infant-mortality rankings.

    – Fracking is extremely unlikely, for very simple geological reasons, to pollute aquifers.

    – The 2008 economic collapse happened all over the nation, not just in Stockton and Vallejo.

    Oh, and when it comes to kids without medical insurance, California is ranked 45th out of 51 (including the District of Columbia). Hardly anything to crow about. Nevada is the state that “leads the nation”.

    Finally:

    [The] state voted by majority rule to tax itself to the point where revenue covers the services which are provided.

    Pete, I agree (well, not really, but to each his own) that “There’s nothing wrong with big government, provided the people are willing to pay for it.” But — call me cynical — somehow I rather doubt that California is going to go peacefully from a $25 billion deficit to a balanced budget in the coming year.

    You conclude with:

    It would be nice if the other 49 states could catch up.

    Well, New York’s taking a run at it. In After America, Mark Steyn describes the resulting scenario thus:

    When California goes bankrupt, the Golden State’s woes will be nationalized and shared with the nation at large: the feckless must have their irresponsibility rewarded and the prudent get stuck with the tab. Passing Sacramento’s buck to Washington accelerates the centralizing pull in American politics and eventually eliminates any advantage to voting with your feet. It will be as if California and New York have burst their bodices like two corpulent gin-soaked trollops and rolled over the fruited plain to rub bellies at the Mississippi. If you’re underneath, it’s not going to be fun.

    What then are the alternatives? And, if you’re a relatively sane, lightly populated state such as Wyoming or a fiscally viable powerhouse like Texas, are you prepared to beggar yourself for the privilege of keeping fifty stars on Old Glory?

    Posted January 6, 2013 at 11:21 pm | Permalink
  8. Malcolm says

    One more thing: take a look at this table, which ranks states by poverty rate, using data from the Census Bureau.

    Go over to the rightmost column, which adjusts the rates to factor in the different cost of living in each state. Click on the heading at the top of that column to re-sort the table.

    Which state comes in dead last? California.

    Posted January 7, 2013 at 12:02 am | Permalink
  9. the one eyed man says

    Perhaps you should read your source material more carefully before you post it.

    1) Your first chart reports that California has an average weekly wage of $1,125, while Texas has $1,013. The last time I checked, $1,125 is 11.05632685% higher than $1,013.

    2) Texas leads the nation in the percentage of its children (all children, not just low income children) which are uninsured:

    http://www.childrensdefense.org/policy-priorities/childrens-health/uninsured-children/uninsured-children-state.html

    http://www.texmed.org/Uninsured_in_Texas/

    3) Your table on poverty rates shows California ranked 35 and Texas at 46. The last time I checked, 35 comes before 46.

    4) Whether fracking can contaminate aquifers is very much an open question, and may have already happened in Wyoming:

    http://www.scientificamerican.com/article.cfm?id=epa-finds-fracking-compound-wyoming-aquifer

    Events such as Fukushima, Macondo, Bhopal, and the Exxon Valdez belied earlier assurances that environmental disasters could never happen. It is too soon to know whether the link between fracking and aquifer contamination is possible, probable, or inevitable – however it is extremely unlikely that the risk is “extremely unlikely.”

    5) As noted above, while there was a national (actually, global) recession starting in 2008, the reason why Stockton and Vallejo went bust is that California is unique among the fifty states in capping real estate taxes, and hence is much more vulnerable to macro economic shock.

    6) The fact that California has a $25 billion debt is irrelevant to whether it will run a balanced budget in 2013. One is cash flow and the other is balance sheet. You could have $100 billion in debt and run a balanced budget, as long as your revenue is no less than your expenses.

    7) California has an investment grade credit rating, which was recently upgraded (and is likely to be upgraded again following the passage of Prop 30). Mark Steyn’s blithe assumption that California will “go bankrupt” and stick the rest of the country with the tab is groundless.

    Could you please elaborate further on making stuff up without even bothering about truth or falsehood?

    Posted January 7, 2013 at 11:09 am | Permalink
  10. Malcolm says

    Peter:

    1) I stand corrected. Texas, at #11, hardly “leads the nation”, however.

    2) Silly me. I figured that the relevant figure concerned the public safety net, so I looked at low-income numbers. I’m scratching my head, though, about how the carelessness of parents nowhere near poverty level to insure their kids says anything about state policies, which is the topic we’re discussing.

    3) No, the poverty table, when adjusted for local cost of living — which is the only reasonable way to measure poverty — puts CA dead last. You didn’t read the instructions.

    4) There are sensible geological reasons why the risk from fracking can safely be assumed to be very low. Even the Times grudgingly reported just the other day on a study reinforcing this view. No technology can guarantee 100% safety, but to be sensible, one must weigh the carefully assessed risks against the clear benefits of abundant fuel and energy independence. I agree that this is something about which reasonable people may differ.

    5) This misses the point. The fact is that only in California had the tax/revenue/spending situation become so precarious that an economic shock sent multiple major municipalities into fiscal flatline. Obviously something’s very wrong.

    6) Oh, I see: just borrow to cover your deficits, and then you have a “balanced budget”. No problem, then!

    7) Hmmm…

    Look, Peter, California can do what it likes. I don’t live there. However, there are many solid reasons to believe that California is an unseaworthy vessel heading into very rough waters. Again, that’s fine — as you said, you guys made your own bed — except that, when it finally slips beneath the waves, the burden of bailing it out will fall upon the rest of the nation.

    Posted January 7, 2013 at 1:18 pm | Permalink
  11. JK says

    I was gonna say something about SF but Henry already did. “Pickings” seem limited.

    It is too soon to know whether the link between fracking and aquifer contamination is possible, probable, or inevitable – however it is extremely unlikely that the risk is “extremely unlikely.”

    PA oil production although not exactly matching say, Arkansas’ fracking – kinda resembles our’s but it’s lower tech. However it does much the same thing and it’s been going on for far longer.

    Well booming is what they call it. When a well-head’s production begins petering to a trickle, an oilfield services company is called (Halliburton is onesuch but I don’t think they operate in PA).

    The “pumping stem” is pulled from the well leaving the outer case-pipe in place – next a solution sometimes called “water nitro” is poured into a container which is then lowered to the “fixing-to-used-to-be” bottom of the well. Two strands of electrical conductors ride down immersed. Then the case-pipe is topped off with regular water. Old fashioned “train robbery dynamite” was the old way.

    BOOM!

    Now I don’t know anything about PA’s water quality – but fracturing went with the BOOM and the well for awhile won’t be petered.

    Posted January 7, 2013 at 1:26 pm | Permalink
  12. “petering to a trickle”

    Is that a technical term, JK?

    Posted January 7, 2013 at 1:56 pm | Permalink
  13. JK says

    When it’s got something to do with unproductive – yes of course.

    Posted January 7, 2013 at 2:41 pm | Permalink
  14. Got it.

    Posted January 7, 2013 at 8:06 pm | Permalink
  15. California revenue declines since passage of Prop 30

    Posted January 8, 2013 at 12:15 pm | Permalink
  16. JK says

    Peter?

    The pickings were slim t’other day and while I won’t go so far as to insinuate this is connected to the topic – it’s “kinda timely”:

    http://www.grindtv.com/outdoor/blog/50609/spectacular+collapse+of+famous+arch+caught+on+camera/

    Posted January 10, 2013 at 9:57 pm | Permalink
  17. For some reason, this spectacular collapse reminds me of the old joke, which ends as follows:

    Marie leans close to his ear and whispers, “Pierre, kiss me lower!”

    Our hero rips off her underwear, grabs a bottle of Cognac and pours it in her lap. He then strikes a match and lights it on fire.

    Marie shrieks and dives into the River Seine. Standing waist deep, Marie throws her arms up and screams furiously, “PIERRE, WHAT IN THE HELL DO YOU THINK YOU’RE DOING?”

    Our hero stands up, defiantly, and says, “I am Pierre, the fighter pilot! If I go down, I go down in the flames!”

    Posted January 10, 2013 at 11:11 pm | Permalink
  18. JK says

    Thanks Henry!

    Lawdy – first time I heard a fellow recite that joke … well, lemme just say it took a loonnng time. As I recall it took about 30 miles on Arkansas’ Highway 7 – and on that road not even Speedemon Justin Kapok can cover a mile in under two minutes.

    Posted January 11, 2013 at 4:36 pm | Permalink

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