No Bailout for California

July 11, 2020 by Dan Mitchell

I’ve already written that state governments shouldn’t get a bailout from Washington.  Today, let’s specifically focus on California, a beautiful state that – as explained in this video – is being ruined by an even-worse-than-average collection of politicians.  This video was produced in 2018, so it goes without saying that California is in even worse shape today, in part because of a coronavirus-caused economic downturn.

But the Golden State also is in trouble because the politicians in Sacramento have been spending like drunken sailors (with apologies to drunken sailors for that unfair comparison).
That’s only part of the problem. California also imposes onerous taxes, an approach that is causing a steady exodus of households and business to states with better policy.  And when you consider other policies, the net result is that the Golden State is ranked only #48 out of 50 for overall economic freedom.

Should this bad track record be rewarded?

Writing yesterday in the Wall Street Journal, Gerald Parsky is willing to give a bailout if strings are attached.

California is facing a $54 billion budget deficit… To help address the shortfall, Gov. Gavin Newsom wants billions of federal dollars. Not so fast. Any bailout should come with strings attached. Washington should tie assistance to tax reform… California’s finances are too dependent on the personal income tax, which is the most volatile form of taxation. California’s revenues from personal income taxes amount to about 67% of all state revenues (up from 11% in 1950). Moreover, less than 1% of taxpayers contribute more than 50% of the tax revenue. The result is that when the economy softens and people earn less—or move out of the state—tax revenue plunges. …A survey of California residents showed that 53% of them are considering leaving.

Here’s Mr. Parsky’s specific proposal.

…these developments underscore the need for dramatic tax reform. …the California Legislature created a bipartisan commission, which I chaired… The commission recommended that California reduce its dependence on the personal income tax by…dropping the top rate from 9.3% to 6.5% and reducing or eliminating many deductions. The commission also recommended eliminating the corporate and sales-and-use taxes, replacing them with a broad new “business net receipts tax.” …A few years later, Gov. Jerry Brown and state policy makers did the opposite…they put forward a statewide initiative that raised the top marginal rate to 13.3%, thus making state revenues even more dependent on a volatile tax and California’s income-tax rate the highest in the nation. …there is an opportunity for the Trump administration to link any federal assistance to an overhaul of the way California taxes its residents.

For all intents and purposes, the author wants to extort California into adopting better (or less-worse) tax policy.  And if Trump (being a big spender) decided to bail out the states, it would be good to attach requirements so that there would be a silver lining to that dark cloud.  But here’s a better approach: Tell the politicians in Sacramento that they caused the mess and it’s their responsibility to fix it. Taxpayers elsewhere in America shouldn’t have to cough up cash to keep California from committing suicide.

Especially since it would simply be a matter of time before the Golden State’s politicians reneged on the deal and re-imposed class-warfare tax policy.  The bottom line, as illustrated by this cartoon from Michael Ramirez, is that California is on a downward trajectory and I don’t see any feasible way of reversing the trend.

P.S. Ramirez has a comfortable lead (as of today) in the best-political-cartoonist contest.

P.P.S. Paul Krugman attacked me a few years ago for being pessimistic about California. He was wrong then and he’s even more wrong today.

P.P.P.S. Some leftists in California have advocated for secession. I wonder if they still have that view.