Saving the Welfare State: Record-High Taxes in California

While Europe’s welfare states are fighting for their lives, here at home our states are in a fiscal fight of their own. Among the ones with the worst budget problems, California edges out the competition with having used IOUs to pay bills for several years now (including tax refunds…). As if that was not enough, Governor Brown is now trying to save America’s largest welfare state with the highest state income taxes in the country. He needs the money to fund a seven-percent General Fund spending increase.

This spells doom for the formerly Golden State. The bitter taste of higher taxes is aggravated by the fact that when Governor Brown ran for office in 2010, and during his first six months in office, he had a genuine ambition to clean up the state’s fiscal mess. But apparently the battle for a moderately acceptable budget in 2011 was too much for Governor Moonbeam: since then he has slowly but steadily given up on trying to tame the spending beast in Sacramento. Now he’s back to the same old tax-and-spend policies that continue to push California deeper into the debt ditch.

While it was true a year ago that he looked like he was his Democrat party in a new, fiscally more conservative direction, he is now back in the fiscal liquor store with his fellow statists from the legislature. Ironically, California media still portray him as a spending cutter. A good example is this article in the Sacramento Bee:

California’s ongoing state budget crisis has claimed another victim: student state workers. In a few weeks the state will ax hundreds of their jobs – just as the school year gets under way. Meanwhile, the state’s university systems have hiked tuition and will probably do it again if voters reject Gov. Jerry Brown’s tax proposal on November’s ballot. … 1,600 state student assistants will soon be the collateral damage of a labor deal struck last month to help close a $15.7 billion budget deficit. Brown and the state’s largest public employees union, Service Employees International Union Local 1000, agreed the 95,000 state workers it represents would take 12 unpaid days off through next June 30 in exchange for, among other things, purging the state payroll of student assistants as of Sept. 1.

These tax-paid student assistants are essentially a supplementary work force that perform duties other workers could easily do for, say, a minimum wage. A typical example of a student job is answering phones, a job that certainly should not be paid for by taxpayers. Any office how needs a full time or part time person to answer their phones should of course pony up the minimum-wage pay needed to hire someone for that job. There are a lot of people who, frankly, don’t mind working a low-paying job: many retirees like to get out of the house for a few hours every day; housewives transitioning from caring for children to getting back to work; students who look for part-time work on their own, without being hand-held by government…

If this is the best sob story that the Sacramento Bee can come up with, then they have failed even at biased journalism.

Before we move on to the California state budget and its non-existent fiscal conservatism, let’s just note that this story gets even more amusing from the fact that unions are the main force behind eliminating the student jobs. This has not escaped the Bee:

SEIU Local 1000 leaders didn’t respond to several requests for comments for this story. However, the union has said it is unreasonable to ask workers to take a pay cut while keeping students in jobs that union members can perform. The SEIU deal has soured 22-year-old CalSTRS student assistant Jordan Adams on state service.

“State service”… He’s on “state service”… Awww… Government takes care of us all

He said he had planned to graduate from California State University, Sacramento, with a degree in finance, go to law school and apply with the state after graduating. Not now. “To be frank, the politics are poisonous,” Adams said. “It feels so spiteful. I really don’t want to be a part of that.” Dmetri Black, a student assistant who will lose her Department of Industrial Relations job, said she still intends to apply for a full-time state position when she finishes school at Laney College in Oakland.”But I have to tell you that after this,” Black said, “I’m not looking forward to paying union dues to SEIU.”

Welcome to reality, my young padawans. Speaking of reality, all this talk about cutting state spending looks slightly different when seen through the prism of the latest California state budget. While there were indeed some cuts last year, this time around General Fund spending is going up by $6 billion, or a rather hefty seven percent.

Governor Brown plans to pay for this in large part with a $5.4 billion increase in personal income tax revenues, thanks to a “temporary” increase in tax rates on incomes above $250,000 for singles and $500K for joint filers. This will push the top marginal income tax rate in California from 10.3 percent to 12.3 percent, the highest state income tax rate in the nation. It will surpass Oregon and Hawaii (11 percent). Neighboring Arizona offers a rate of 4.54 percent. If  a couple that runs a business together and earn $1 million per year were to move there from California, they would save $77,600 per year.

Of course, if they moved to Nevada, Texas, Washington state or Wyoming they would not have to pay any state income tax.

California is already on the losing end when it comes to taxpayers. According to U.S. Census state-to-state migration data for the period 2007-2009, California lost 87,000 more residents than it gained. And that was before the full force of the recession struck; once we entered the recession, every dollar saved on lower taxes matters even more to taxpayers, especially those with small businesses and those whose high-earning profession gives them some choice as to where to live. Of the five states to which California suffered the biggest net migration loss, three have no state income tax: Texas, Nevada and Washington state. The other two in the top-five are Oregon, which has had a major growth in computer-tech jobs over the past decade, and Arizona which, as mentioned, offers substantial state income tax savings over California.

It is troubling that Governor Brown wants to increase government spending by such bulky proportions as proposed in his latest budget. It is even more troubling that he wants to increase spending on permanent items such as health care and education, items that can be transferred to the private sector with the right kind of reform. To top it off, Governor Brown wants to fund his spending spree with the highest state marginal income tax rates in the country.

If ten percent of the tax filers making more than $500,000 per year decide to leave California due to this higher tax the state will, by a rough estimate, lose more than a quarter of a billion dollars of the expected extra tax revenues that these filers are supposed to pay under Governor Brown’s “temporary” higher rates. If we add filers in the $250-$500K bracket the loss could easily top $500 million – and that is, again, just losses out of the extra revenues that Brown is expecting to get from his higher rates.

The total loss of state personal income tax revenues from such an outbound migration could easily top $1.5 billion. That loss would wipe out 30 cents of every extra dollar Brown is banking on. And then we have not even considered the loss of sales tax revenues as these taxpayers take their spending out of state – or the loss of jobs as these small businesses either lay off their California workers or offer them to get onboard the outbound U-Haul.

Brown’s feeble attempts at saving the welfare state are not going to work. He is running his state into the ground, doing exactly what he promised not to do when he ran in 2010.