By Don Schmitz
Last year California had an amazing $97.5 billion budget surplus, the biggest state surplus in U.S. history. Gleefully, the governor and legislature exploded spending while boasting of their success. This year, the legislative analyst is predicting a $73 billion deficit, nearly twice that predicted by Gov. Gavin Newsom, and another American record, in the wrong direction. That is a swing of $128 billion in one year. Stunning and unprecedented, but why?
California depends largely on personal income tax and has one of the most “progressive” income taxes in the nation. You know, it’s all about making the affluent pay their “fair share.”
With the highest income tax in the country, the top income bracket pays 14.4 percent. According to the Legislative Analyst’s Office, the top 1 percent of earners pay half of the state income taxes. Half. The top 5 percent of earners pay 70 percent of California’s income tax. How ironic to watch President Biden at the State of the Union speech thunder about the rich paying their fair share. But I digress …
The budget surplus was make believe, created in part by the massive federal COVID-19 relief bill passed by Congress, which added $26 billion to the state budget, and pumped $150 billion into the California economy. Of course, that federal money was simply printed, while the fiscally irresponsible feds spent trillions of deficit dollars adding to the debt we are burdening America’s children with. And how did California manage all that federal largess? Its Employment Development Department mishandled unemployment claims so badly it’s estimated that $31 billion was lost to fraud, including $1 billion paid out to prison inmates. That’s more money than many state budgets.
Part of the problem is spending, of course. In the mid-1970s, California’s budget was around $50 billion, while we built water systems, highways, and universities. In 2000, it was over $150 billion, and last year $300 billion. During that time California’s population has almost doubled, but spending has increased six times over.
Accordingly, middle class and affluent people are fleeing California, driven out by the highest taxes in the country, and lack of housing. We have the largest out-migration of any state by far, whereupon our population actually decreased the last three years, for the first time since we became a state. Last year 343,000 people left for states like Nevada and Florida, 700,000 left California in the last two years alone. This out-migration is comprised mostly of tax-paying productive working families. Massive foreign migration into California, mostly low-income earners, is blunting the population decline. Predictably, based on the supplemental poverty measure, California has the highest percentage of poverty in the nation. With only 12 percent of the nation’s population, we have one-third of the nation’s welfare recipients, and one-third of Californians live in or near poverty.
The profligate spending of Sacramento isn’t the only driver of the budget crisis. Our tax code is also the culprit. As currently structured, our tax code means the state does well when the rich have a good year with their investments, but when they have a bad year, California is in trouble. In 2014, a blue-ribbon commission formed by Gov. Arnold Schwarzenegger and Speaker Karen Bass made reform recommendations to blunt the boom and bust of our tax code. It recommended in part reducing the top basic rate to 6.5 percent. It sought to address the imbalance in our progressive income tax code that soaks the rich, but failed. The wealthy are mobile, so if/when they grow fatigued of carrying the tax load for the other 95 percent, they can and will leave for other states.
It gets worse, as this is just the annual budget dance in Sacramento. Looming on the near horizon is the CalPERS and CalSTRS pension liability. The public employee unions, the biggest donors to campaign coffers of the super majority Democrats, have been given enviably generous pension plans. A 2022 report by the American Legislative Exchange Council found California has the largest unfunded pension liability in America, at $1.5 trillion. That’s not a typo, yes, trillion, and that doesn’t include other benefits like state-paid health care (which Sacramento now gives to illegal immigrants). Taxpayers contribute the largest share of the funding, and are obligated to do so. There was some pension reform in 2013, but clearly inadequate, and those bills will soon come due.
California has the highest sales tax nationally at 7.25 percent, highest gas tax at 77.9 cents per gallon, and a graduated utility tax whereupon we pay two to three times the national average for electricity. We are already at a tipping point, where the burdensome taxes are driving taxpayers to less punitive states. Remember the 1971 rock lyrics; “Tax the rich, feed the poor ’til there are no rich no more”? California might just succeed, but what happens when there are no rich, no more?
Don Schmitz is an independent columnist for Atascadero News / Paso Robles Press, he alongside Lance Simmens write a bi-weekly column on national topics from the perspective of their political leanings. You can forward any comments you have to editor@13starsmedia.com.