Golden State, Broken State

The State of California is facing a fiscal crisis as the governor seeks to close a nearly $42 billion budget gap.  It is a problem that has been mounting for years and finally looks to come to a head as the economy slows and tax receipts dwindle.  With the legislature having passed a $14 billion tax increase that will surely drive the final nail into the state economy, what will happen next?

When Arnold Schwarzenegger was elected governor, he inherited a financial problem but was able to move forward by securing loans and enjoying an unexpected increase in tax receipts (from, as it turns out, the housing bubble).  But because spending has increased by a whopping 33% over the past four years it looks as if it’s going to be time to either cut spending or raise taxes.  One can point the finger towards Gov. Schwarzenegger himself who, after being elected when former Gov. Gray Davis was recalled, played tough on reform then when his popularity sunk let the Democratic-controlled state legislature increase spending.  Also, California’s voter approved propositions pushed through hundreds of billions of dollars in new spending on everything from infrastructure to education initiatives.

The government in Sacramento, long dominated by Democrats, sent spending increase after spending increase to the governor who signed them into law, helping to bring California to this point.  Now ordinary Californians are looking at higher taxes when they buy a car or pay their income taxes.  With more and more of the population unemployed (the rate is near 10%) there are fewer people spending money.  So the government hopes that the estimated $63 billion it will receive will postpone the day of reckoning for a legislature loathe to cut spending.  This is bad policy and bad government.

One of the great ironies of this entire crisis is that the issue which riled voters so much was an increase in the vehicle license fee which put Schwarzenegger into office.  Back then, car sales ground to a halt as voters waited to see whether or not the new tax would stick.  Now, the Democrats have again raised the vehicle license fee but this time the state is in a recession and car sales have already slowed.  Also, sales tax was raised by 1% which will further hurt the state economy.

The pattern that began in Washington, D.C. with President Obama warning of grave consequences should the stimulus bill not be passed has been replicated in Sacramento as the calls for passing a tax increase echo what was said in Washington only a week ago.

The biggest problem, aside from spending too much money, is that the state is not business friendly:

The American Legislative Council recently ranked California 41st of 50 states for economic performance and noted that the state’s tax system, in particular, is a mess. In a 2005 survey of 458 CEOs by Chief Executive Magazine, 182 called California the worst state in which to do business based on “tax rates, regulations, work force attitudes and quality of life issues.”

In fact, California-based Intel said it was looking to spend $7 billion to expand in a move that will create 7,000 new jobs.  Surely California can use the investment and the employment.  Too bad state Democrats (and the governor) have created such a hostile “big business” environment that Intel is looking to spend its money in Oregon, Arizona and New Mexico.  More bad news for a state which lost 25,000 manufacturing jobs in 2008 and 25% of its industrial workforce since 2001.  According to Investor’s Business Daily:

Businesses face huge costs to remain or expand. According to the Milken Institute’s Business Cost Index, California businesses face overall costs that are 23% higher than other states on average.

Taxes are 21% higher, and industrial and commercial space costs more. Even wages in a state that has millions of low-paid illegal immigrants are on average 15% higher than other states’ wages.

The message California should send to the rest of the country is that heavy social spending when combined with an anti-business message will result in a fiscal disaster.  In fact, California is the 6th most expensive state in which to do business.  The other states (excluding Hawaii and Alaska due to their remote locations) are all run by Democrats: New York, Massachusetts, and Connecticut.

Do you think the press is standing up for the Republicans in the state legislature for having tried to stop this insanity?  Of course they aren’t… read what the Los Angeles Times had to say about it:

Assembly Republicans on Sunday blocked a proposed spending plan that would have closed the state’s $15.2-billion shortfall with the help of tax hikes on the wealthy and corporations.

The failure of the Democratic plan means the state will continue to operate with no budget more than a month and a half into the fiscal year, heightening uncertainty for schools, healthcare providers and other services.

“The bottom line is we cannot solve a $15-billion deficit without new revenue,” said Assembly Speaker Karen Bass (D-Los Angeles).

The Republicans should be commended for trying to force the state to make the necessary reforms it needs in order to return to health both in the short term and in the long term.  But, as was the case on the national scene, Republicans are being called unpatriotic.

Unfortunately, the price Californians may have to pay for having their every spending desire met is a financial catastrophe.  The same lesson that we are facing in California the Federal government is facing concerning the wasteful, $800+ billion “stimulus” bill that was just passed… borrowing money you don’t have to pay for spending you never should have passed is a recipe for disaster.

Thomas Paine had it right when he said: “That government is best which governs least.”

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