Friday, August 1, 2008

California is Bankrupt

California is burning fiscally, and the Legislature is fiddling.

No more gimmicks. No more windfall, one time payments, such as the tobacco settlement. No more “trust” funds to be raided. The state’s coffers are empty. The Indian casinos can’t cover the nut.

California is hurting. The unemployment rate is up to 6.9%. The housing industry is toast; Hollywood is exporting jobs, and the state budget deficit is climbing through $15.2 billion, on its way to $20 billion. The budget was due July 1, and we’re into August. The state is operating at a 10 1/2% deficit.

And what is the Legislature doing? Nothing!

It’s in recess.

That’s good because as long as it’s not in session, it can do no damage.

It doesn’t have to act because it knows what it wants to do – raise taxes by $11 billion.

It’s opening gambit will raise the base rate of the state sales tax by a penny, raise the top marginal tax rate to 12% from 10.3%, eliminate indexing for inflation, and raise the top corporate tax rate to 9.3% from 8.4%.

Governor Schwarzenegger responded yesterday by signing an executive order, reducing most state employees to minimum wage, cutting the jobs of 20,000 part time and contract workers, freezing hiring, and stopping almost all overtime.

The current state sales tax is 7.25%, the highest in the nation, but localities can add to it such that the sales tax is already substantially higher in cities like San Francisco.

If these tax increases go through, California will be the highest taxing state in the country. Even New York will seem a bargain.

The Governor’s act is not exactly a profile in courage since the employees received their monthly paycheck two days ago.

Let’s look at the legislative accomplishments this year:

Mandated hands-free driving. Whether hands free or cell phone in the ear, the problem is one of distraction, not hands free. In any event the Legislature, in its infinite wisdom, did not restrict the more dangerous activity of text messaging. Nor has it taken any steps against dashboard dinning.

Banned trans fats in restaurant cooking, effective 2010

Animal owners can now set establish “pet trusts” to pay the costs of Fido’s care when the donor dies

Still under consideration

A tax of 25 cents on plastic bags

A true sin tax of 25% on the gross revenues of producers and distributors of adult entertainment, including strip clubs. Watch Debbie move from the San Fernando Valley to Dallas and Vegas

A ban on plastics containing bisphenol A in consumer products.

A ban on live pets sitting in driver’s laps (nothing said about dead pets)

Enactment of mandatory sick live, whereby employees would be entitled to nine paid sick days annually (passed by Assembly)

A proposed additional tax of $1.80 per six pack of beer; i.e. thirty cents a can. So much for Joe Sixpack

Proposed taxes on I-Tunes, music downloads and ringtones

A ban on smoking in apartments

These are the other acts almost passed by the Legislature as the budget is burning

Banning Mylar balloons

Mandatory pet sterilization

“Solving” high gas prices by imposing a 6% tax on oil produced in the United States and a 2% “windfall profits” tax on oil company profits over $10 million

The Assembly passed, and the Senate was in the process of passing, an affirmative action requirement on California foundations with assets over $250 million. The bill was pulled when the ten largest foundations “voluntarily” reached an agreement with the legislative leaders

A mandatory law enforcement officer on every cruise ship sailing from California ports. The officer would be funded by a tax of $1/day per passenger. The tax revenues would greatly exceed the costs of the officers.

The true accomplishment of the California legislature is the second lowest credit rating of all 50 states, beating out only Louisiana.

A major accomplishment of the state Senate is that lobbyists who donate to the Legislature’s charity can accompany Senators on their junkets.

The Legislature is in a snit because its stealth referendum proposal, poised as a clean government measure, was defeated. It would have extended term limits by up to eight years, keeping the current legislative leaders in office.

It has successfully opposed the establishment of non-partisan redistricting.

The state budget was $104 billion when Governor Gray Davis was recalled by voters in 2003. Since then, state revenues rose over $30 billion.

This substantial 30% increase is outstanding, but neither the Democratic Legislature nor the Republican Governor controlled spending, which increased over $40 billion.

Unless spending is controlled, no state, not even the Golden State, can raise taxes fast enough.

Here is the Legislature’s understanding of spending. The outgoing Senate Majority Leader, Don Peralta, has spent 14 million so far on legal fees, partially paid for by the California Democratic Party, to ward off a federal corruption indictment.

Fabian Nunez has just stepped aside as Speaker of the Assembly. He grew up economically disadvantaged, but has surmounted that hardship. Recent indulgences include”

$1,795 for dinner in Paris, France (not Paris, California)

$2,562 in office supplies at Louis Vuitton

$5,149 for a meeting at a French winery

$100,000 bonus to his chief of staff

These expenditures were paid for out of campaign funds and the California Democratic Party

Most legislators undoubtedly know that higher taxes will encourage residents and businesses to vote with their feet, but they also realize that the beneficiaries of the increased spending, will remain, and likely vote. History has repeatedly shown us, just this past year with Michigan’s $2 billion in tax increases and in 1990 with large tax increases in California, that they never raise the projected revenues, but do reduce private expenditures.

Here are the current taxpayers in California. Those with incomes over $100,000 pay 83% of the state’s income tax revenues. The top 6,000 taxpayers pay $9 billion in state income taxes.

California’s siren call has attracted waves of immigrants seeking their fortune for 160 years, starting with the 49ers seeking gold.

But now they are fleeing. From 1996 to 2005 1.2 million more Californians left the state than entered from other states. The state’s population growth is fueled by births exceeding deaths and illegal immigration. During the 1990 recession, about 1 million Californians departed for more hospitable states like Oregon, Nevada, Arizona, Colorado, and Utah.

Unfortunately for California, these expatriates are middle class, retirees, and entrepreneurs - the economic producers. Unfortunately for the California Republican Party, they formed the backbone of the Party, as the state becomes solidly Democratic.

Those staying are increasingly dependent upon government payments. They have no incentive to cut or freeze taxes.

Republicans have just enough legislators to prevent any tax increase. The rumor is that, contra to his public position, the Governor is privately pressuring Republicans to riase taxes.

California’s budget problem is compounded by two wild cars. First, any budget must be approved by a 2/3 vote in both Houses of the Legislature. Thus, six Republicans in the Assembly and two in the Senate must agree to raise taxes.

Second, pursuant to Proposition 47, half of all new revenues must go the schools.

Not a pretty picture because the state is bankrupt

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