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Looming Deficits Present Opportunity to Find Solutions for California

Less than six months ago, California’s state legislature approved a record breaking $300 billion state budget. Within that total, and to finance most of the state’s ongoing operations, was a general fund allocation of $235 billion for the fiscal year ending June 30, 2023.

Record breaking budgets are nothing new. Only ten years ago, California’s general fund was $93 billion, which adjusted for inflation would be $118 billion in today’s dollars. Meanwhile, California’s population over the past ten years has only grown from 38 million to 39 million. This means that inflation adjusted per capita general fund spending in California has increased from $3,124 back in 2013, to $6,023 today. California’s state government is spending twice as much money today per resident as it did just ten years ago.

This explosion in spending has yielded dubious benefits. By nearly every measure, things are worse off today in California. Obvious examples include expensive and unreliable energy and water, failing schools, rising crime, unaffordable housing and college tuition, and an exploding homeless population, but that’s hardly the entirety of the worsening challenges facing Californians. The decade-long run of record tax revenue spawned an avalanche of new regulations, driving up prices, discouraging expansion of big business and driving small businesses under. Through its spending priorities California attracts the dependent and repels anyone striving for independence. It’s grotesquely inequitable.

This is the context in which to view the latest revenue projections coming from the nonpartisan Office of Legislative Analyst. The concern […] Read More

Inflation adjusted per capita state spending doubles in one decade – for what?

The California State Legislature has just released the “Floor Report of the 2022-2023 Budget,” and it’s a doozy. Representing an agreement between the budget committees of the Assembly and the Senate, and building on Governor Newsom’s proposal, this $300 billion monstrosity has moved one step closer to becoming final.

To fully appreciate how out of control California’s state government spending has become, compare the general fund spending growth over just the past ten years. The following chart, relying on official state budget reports going back to 2012-13, shows California’s General Fund spending by year. Back then, the general fund was $92.9 billion. Adjusting for inflation and expressing this amount in 2022 dollars, the 2012-13 general fund was $118.4 billion, barely half the swollen $235.5 billion that is projected for the upcoming budget year.

When you take into account the fact that California’s population has only increased by 3.1 percent in the past decade (it’s actually declined for the past two years), this budget profligacy becomes even more inexplicable. The inflation adjusted (i.e., in 2022 dollars) per capita general fund spending ten years ago was $3,124. It has now exploded to $6,023 per person. What has the average Californian gotten for all that extra money, apart from taxes that are higher than ever, and set to go even higher?

By almost every objective measure, Californians are worse off today than ten years ago. Back in June 2012, the average cost of a home in California […] Read More

California’s General Fund Relies on Bailouts and Billionaires

One of the biggest reasons California’s technology moguls supported the Biden/Harris candidacy had nothing to do with ideology. It had to do with their pocketbooks. Because with a Californian presiding over the Senate, and a Californian Speaker of the House, expect federal bailouts to flow west by the hundreds of billions.

The likelihood of federal money to prop up failing local governments, state agencies, and public employee pension funds has just gone from remote to probable, as Democrats take control of all three branches of the federal government later this month. Simultaneously, and as a result of this political outcome, the likelihood of massive new state taxes here in California targeting the super rich drops from probable to too-close-to-call.

Consider the impact of Assembly Bill 2088, if enacted, on California’s wealthiest households. This “wealth tax” will impose, year after year, an annual tax at a rate of 0.4 percent of any California resident’s worldwide net worth in excess of $30 million.

To use the example of California’s richest man, Elon Musk, who according to Forbes had a net worth in early January of $176 billion, AB 2088 would require Musk to pony up 704 million, every year, for the privilege of living in California. Mark Zuckerberg, with a current estimated net worth of $92 billion, would have to pay the state $368 million. Every year.

It is easy enough to understand the emotional indifference that a libertarian might display towards Musk getting soaked for $704 million […] Read More

How to Reduce the California State Budget by $40 Billion

As of a few days ago, high-wage earners have a new reason to leave California: their state income taxes are no longer deductible on their federal income tax returns.

Can California’s union-controlled state legislature adapt? Can they lower the top marginal tax rates to keep wealthy people from leaving California?

The short answer is, no, they cannot. They cannot conceive of the possibility that California’s current economic success is not because of their confiscatory policies, but in spite of them.

Earlier this year California’s union controlled legislature approved a gas tax increase that will increase state tax revenue by about $5.0 billion per year. Next in their sights is changing property taxes to a “split roll” system, whereby all commercial properties will no longer be protected from steep tax rate increases. Also under consideration is extending sales taxes to services, along with taxes on water, marijuana, and, who knows, maybe even robots.

These new taxes have attracted a lot of attention, but in reality California’s state government derives most of its tax revenue, 58%, from personal income tax. In recent years personal income taxes have contributed as much as 65% of the California state government’s total tax revenue. California’s top marginal income tax rate of 13.3% is by far the highest in the U.S. Oregon has the 2nd highest rate, at a much lower 9.9%. The impact of this can be seen on the chart depicted below, which is taken from the […] Read More