As the California Legislature reconvenes this week for the new session, Californians will hear two decidedly different messages from both politicians and political pundits about the “state of the state.” Governor Brown will surely tout the “California comeback” and argue that the state is in much better fiscal health than just a couple of years ago. On the other hand, more conservative voices will argue that California remains in fiscal crisis, that our system of governance is still fundamentally flawed and that those who believe the state is on the right track are simply fooling themselves. So who is right, the “declinists” – as Governor Brown has labeled some of us in the latter group – or the “delusional” in the former?First, in the “comeback” camp, there is no denying that California is enjoying the benefits of the national economic recovery. This rebound has resulted in much more than anticipated tax revenue for state coffers. In fact, for fiscal 2014-15 the Legislative Analyst is projecting an additional $2 billion.
Second, Brown will contend that we have already made substantial progress in dealing with the vast amount of accrued government debt racked up in the last decade. To his credit, Brown has at least laid out a game plan for some – but not all – of the pension obligations by requiring that public school teachers pay more into their pension fund known as CalSTRS. Moreover, the red hot stock market has – at least temporarily – made a significant dent in the unfunded liability of the state’s pension funds.
Third, while not the hard spending cap based on inflation and population that fiscal conservatives would prefer, the passage of Proposition 2 in November enhanced the efficacy of the state’s “rainy day” fund. California’s most significant fiscal problem is the over-reliance on a fraction of California’s population – the wealthy – to pay the lion’s share of tax revenue. This results in wild swings in revenue depending on how the wealthy are doing. Proposition 2 was designed to smooth out the peaks and valleys of revenue so that we might be better prepared when the next inevitable recession occurs.
The opposite of this optimistic view is the “declinists/naysayers” camp whose adherents believe that California remains in fiscal crisis. Sure, the economic recovery is making things look better temporarily, but this is no more than putting a coat of paint on a decrepit house with a crumbling foundation.
The list of metrics supporting the naysayers is impressive. California ranks number one in poverty out of all 50 states. Nearly a quarter of the state’s 38 million residents (8.9 million) live in poverty. Business flight out of California to more business friendly states like Texas, Arizona, Nevada and Utah is accelerating. The tax hikes approved by voters via Proposition 30 slammed California’s wealthy with a huge retroactive income tax hike. Their response has been to vote with their feet and move to more favorable climes such as Texas & Nevada which have no income tax at all.
There remains a broad consensus that California’s tax structure is irrational. Rather than lowering taxes which would make California more competitive, the response from the political left is to propose a new tax on services. Given that California already has the highest income tax rate in America as well as the highest state sales tax rate, any tax “reform” that seeks to generate billions in new revenue will sink California even further.
Recent reports from the Los Angeles Times, no bastion of conservatism, note that millennials – the youth we need for economic survival – can’t afford housing in California and are moving out of state to escape anti-growth regulations which unnecessarily double the cost of a home or apartment. The Times also reported that the same out migration is occurring for the poor and middle class. And speaking of the middle class, they are about to be hit with a one-of-a-kind gas tax – imposed only by California – that will make fuel costs even higher.
A comprehensive list of California’s governance problems would fill volumes and can’t be recounted here. Suffice it to say, however, that those of us who have been labeled as “declinists” have a firmer grip on reality that those who believe that California’s natural beauty and weather will overcome all problems.
To be clear, those of us who possess a realistic grasp of the magnitude of challenges facing the Golden State do not believe that California is a bad place. To the contrary – it is a great state with a great deal of potential. The only question is whether our elected leadership will allow the citizens of California to pursue happiness as they see fit unshackled by foolish and counterproductive government policies.