Lessons From A Declining California

I love the state of California. Its my home state. It is a state that has everything. Picture perfect beaches, amazing mountains and world famous deserts. It has a strong diversity of people and a wide range of activities for tourists and citizens to enjoy. 

So, why are so many people leaving the state? 

The Daily Beast provides us with some clues: 

Californians needs to ask if the state has started a cycle of decline, in which a loss of jobs to other states leads to a loss of tax-paying residents, and in turn to a deterioration of the public services that make the state even less desirable for businesses. This “toxic state syndrome,” as it might be called, could be very difficult to shake. The businesses that bring jobs (or take jobs with them when they leave) look for certain things: a skilled work force, relatively low costs, sound infrastructure and public services, and—maybe most important of all—some assurance that these conditions will stay the same.

A state in chronic fiscal distress can’t offer such predictability, and California is a very distressed state. For most of the past decade, its credit rating has been at or near last place in the nation; currently it is rated the lowest by Standard & Poor’s, and Moody’s ranks only Illinois lower. Texas, on the other hand, is just one notch from the top on the S&P scale.

However, California could turn things around. But with Jerry Brown at the helm with a Democrat majority legislature, recovery will not happen if Jerry Brown's tax increases takes place:

Californians could make things worse this November when voters decide on a measure, backed by Gov. Jerry Brown, to raise its income tax rates (already near the highest in the nation) to prevent deep cuts in school spending. That might produce a temporary burst of revenue but leave the state even more dependent on a volatile revenue source. Then again, if the tax hike doesn’t pass, schools will take a hit that could leave California that much less attractive to employers and employees.

What may be most damaging about California’s tax debate is its tone of desperation. The state is like a man at the end of his rope who has taken hostages—in this case, the schools. Meanwhile, Texas and other states are poaching California jobs with tax incentives at a scale that California state and local governments can’t afford, most recently with the $36 million package of tax breaks and investment funds that convinced Apple Inc. to expand in Austin and add some 3,600 jobs.

Raising taxes is a good way to make a state's terrible financial situation even worse.  Frank Rich in an article that appeared in the Wall Street Journal explains why:

Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.
Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

Frank Rich discovers that California addicted to raising taxes on the rich because they think that the rich will stick around and continue to pay these taxes:

"These revenues have a narcotic effect on legislatures," said Greg Torres, president of MassINC, a nonpartisan think tank. "They become numb to the trend and think the revenue picture is improving, but they don't realize the money is ephemeral." 

However, what California and other states don't realize is that raising taxes on the rich leads to the government receiving less revenue in taxes.  As John Stossel mentioned in a television special , “Tax The Rich”, “Maryland’s millionaire tax was supposed to bring in $106 million. Instead revenue went down by $257 million. Many millionaires just left the state.”

The Democrats in California as well in other states and in our Federal government want to soak the rich because they believe that the myth that the rich don't pay their fair share is real.

Its a simple lesson that liberals, progressives and Democrats don't understand. Raising taxes doesn't fix a state's or a nation's financial problems. It only makes it worse for the following reasons:  they rely on the rich to pay taxes while those in lower income taxes pay little to no income taxes at all, they spend more money than they earn in revenue and think they can sack the rich to atone for their irresponsible spending habits, the rich make money in good times but lose a lot of it in bad times, rich people will leave the state if they are taxes or demonized too much and create laws that make it harder for business to employ people to work.

California can turn around only if they learn the simple lesson of stop taxing the rich, spend with in your means and create a business friendly environment in which job creators, innovators, investors and rich people want to stay. 

Which leads me to our current financial problems in the Federal Government. The United States is facing a huge tax increase that conservatives are calling "Taxmageddon" is a one-year $494 billion tax increase slated to strike the economy on January 1, 2013. The reason why taxes would be going up dramatically is because end of the Bush-era tax cuts that are scheduled to expire at the end of this year while its also the start of new taxes like ObamaCare and other taxes that target the rich. The Congressional Budget Office and International Monetary Fund have also both issued warnings regarding these incoming tax hikes.

Unless our elected officials in California and Washington D.C. learn the lessons above and engage in real tax reform, we will face a huge financial mess of our own making. As Paul Ryan said, these problems are avoidable and we can do something about it. But it must be done NOW.