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Friday, January 22, 2010 11:52 PM


Why Is California Broke?


Inquiring minds are asking "Why Is California Broke?" It's a good question. Please consider ...

  • California has the 3rd highest state income tax in the nation: 9.55% tax bracket at $47,055 and 10.55% at $1,000,000 - Tax Foundation 2010 State Business Tax Climate Table 2
  • California has the highest state sales tax rate in the nation by far at 8.25%. Indiana is next highest at 7%. Table 15
  • California corporate income tax rate is 17th worst in the nation with a rate of 8.84%. - However, of the non graduated states, only Pennsylvania at 9.99%, Rhode Island at 9.0%, and the District of Columbia at 9.98% are higher. One size fits all (and a very high one at that) is exceptionally hard on small businesses. Table 8 and Table 2
  • California ranks 13th best in property taxes. However proposition 13 causes massive distortions for new buyers. Table 2
  • California has the fourth highest capital gains tax 9.55%. - Capital Gains Tax Rates By State
  • California has the highest gasoline tax as of January 2010, averaging 65 cents/gallon. The national average is 47.4% - API Motor Fuel Taxes
  • California has one of the highest state vehicle license car taxes, 1.15% per year on value of vehicle, up from 0.65% in 2008. [expired link]

So where's the money going?

  • 1 in 5 in LA County receiving public aid, nearly 2.2 million people as of February 2009. 20% in Los Angeles County receive public aid
  • California has 12% of the nation’s population, but 36% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 8 states combined. Unlike other states, this “temporary” assistance becomes much more permanent in CA. July, 2009 California has more recipients in key welfare category than next eight states combined.
  • California prison guards highest paid in the nation. The maximum pay of California's prison guards is nearly 40 percent higher than that of the highest-paid guards in 10 other states and the federal government, according to a study by the California Department of Personnel Administration. Cal-Taxletter
  • California teachers easily the highest paid in the nation. National Education Association
  • California now has the lowest bond ratings of any state, two steps above junk. The new rating affects about $72 billion of general obligation and lease-supported bonds. July 15 California bond rating cut again
  • California ranks 44th worst in “2008 lawsuit climate.” Institute For Legal Reform
  • California, a destitute state, still gives away college education at fire sale prices. California community college tuition is by far the lowest in the nation. Nationwide, the average community college tuition is 4.5 times higher than California CC’s. This ridiculously low tuition devalues education to students – resulting in a 30+% drop rate for class completion. Moreover, 2/3 of California CC students pay no tuition at all – filling out a simple unverified “hardship” form that exempts them from any tuition payment, or receiving grants and tax credits for their full tuition. [Expired Link]
  • California offers thousands of absolutely free adult continuing education classes. In San Diego, over 1,400 classes for everything from baking pastries to ballroom dancing are offered totally at taxpayer expense. San Diego Continuing Education
  • California residential electricity costs 13.81 cents per kilowatthour. The national average is 6.99-8.49. US Department of Energy
  • It costs 38% more to build solar panels in California than in Tennessee – which is why European corporations have invested $2.3 billion in two Tennessee manufacturing plants to build solar panels for our state. March 5, 2009 More Solar Companies Producing Elsewhere to Sell to California

The above lists reformatted and reordered from a list compiled by Richard Rider, Chairman, San Diego Tax Fighters.

US Competitiveness

Here are a few snips from the Tax Foundation 2010 State Business Tax Climate report.
American companies often function at a competitive disadvantage in the global economy. They pay one of the highest corporate tax rates of any of the industrialized countries. The top federal rate on corporate income is 35 percent, and states with punitive tax systems cause companies to be even less competitive globally.

State lawmakers are always mindful of their states’ business tax climates, but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broadbased tax reform. This can be a dangerous proposition as a case in Florida illustrates. In July of 2004 Florida lawmakers cried foul because a major credit card company announced it would close its Tampa call center, lay off 1,110 workers, and outsource those jobs to another company. The reason for the lawmakers’ ire was that the company had been lured to Florida with a generous tax incentive package and had enjoyed nearly $3 million worth of tax breaks during the previous nine years.

Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state really can’t attract employers without such packages, it is often because punitive tax laws have created a woeful business tax climate.

Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

Most states have at least one major tax area that is hospitable to business and economic growth, and most have at least one punitive tax that makes the state’s tax climate look comparatively bad. For example, California ranks poorly overall, 48th best, despite having the 13th best score on property taxes. On the other end of the spectrum, Delaware ranks 8th best despite a dreadful corporate income tax that ranks as the second worst in the nation.

California Improves (Sort Of)

With such a low ranking, it may not assuage California taxpayers to hear that the state’s tax system has improved one spot this year and now ranks 48th best. Unfortunately, even this slightly good news does not come because of improved tax policy. New York implemented even worse policies, dropping below California.

In fact, California’s raw score dropped substantially because it added 0.25 percent to each personal income tax rate and increased its statewide sales tax to 8.25 percent, now the nation’s highest state-level rate.
State Business Rankings



click on chart for sharper image

As amazing as it might seem, California is not dead last. New York and New Jersey are ranked worse in business climate than California. The dubious honor of worst state belongs to New Jersey. Congratulations!

California Pension Crisis

To top things off, please consider Plundering California: How Public-Sector Unions Brought The State To Its Knees.
Government workers also enjoy absurd protections. The Los Angeles Times did a recent series about the city’s public school district, which doesn’t even try to fire incompetent teachers and is seldom able to get rid of those credibly accused of misconduct or abuse.

A state law referred to as the Peace Officers Bill of Rights, along with excessive privacy restrictions, likewise makes it nearly impossible to fire police officers who abuse their authority.

The media have finally started to take notice, largely because of some impossible-to-ignore financial excesses, particularly the tens of billions of dollars in “unfunded liabilities”—that is, future debt—run up by politicians more interested in pleasing union officials than in looking after the public’s finances. News reports have also focused on scandals at CalPERS, the California Public Employees’ Retirement System, which has faced record losses after making risky leveraged investments in bizarre real-estate deals. (The government pension system encourages such risky behavior: with defined-benefit systems, union members stand to gain if the investments go well, while taxpayers shoulder the burden if they don’t.) Meanwhile, the Los Angeles Times reported on a politically connected insider who received $53 million in finder’s fees from CalPERS, raising questions of pay-to-play deals.

But the real scandal is a two-tier society where government workers enjoy benefits far in excess of those for whom they supposedly work.
The above snip is from the book Plunder! by Steven Greenhut.

The answer to the question Why Is California Broke? should now be quite apparent.

  • California has a horrible business climate that drives business elsewhere.
  • California has an array of some of the highest tax rates in the nation.
  • California is beholden to the unions, especially the teachers union and prison system, and at the municipal level to the police and fire unions.
  • California hands out money with free services encouraging an influx of illegal aliens and an exodus of those wealthy enough and mobile enough to move.

As Steven Greenhut puts it "The real scandal is a two-tier society where government workers enjoy benefits far in excess of those for whom they supposedly work."

That by the way, is not only why California is broke, it is a huge part of the reason the nation is broke.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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