The Magazine

Decline and Fall

California votes for more: taxes, spending, debt, government

Nov 19, 2012, Vol. 18, No. 10 • By CHARLOTTE ALLEN
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On November 6 voters in California did something nearly unheard of during the past 30 years: They approved, by a margin of 54 percent to 46 percent, a ballot measure raising state income taxes on the most prosperous Californians and sales taxes on everyone, even though the state’s sales tax is already the highest in the nation.

Jerry Brown and Prop 30

Newscom

The successful tax-hike initiative isn’t just a hoped-for generator of revenue: a projected $34 billion over the next seven years, which California desperately needs because it is running a $16 billion budget deficit and its cumulative total debt is at least $618 billion, the highest in the nation. That latter amount includes up to $500 billion in unfunded pension liabilities for 220,000 state employees plus billions in unpaid bills, delayed payments to schools, and amounts raided from dedicated funds to cover general expenses.

The new tax is also intensely symbolic. It represents the culmination of a two-decade-long process in which the nation’s most populous state, once a prosperous industrial and high-tech powerhouse and magnet for immigrants from elsewhere in the country, has transformed itself into something else: a high-tax, high-spending, highly regulated, and chronically broke welfare state that is fast losing to out-migration both its middle class and the businesses and industries that create jobs. California factories once housed such industries as steel, automobile manufacturing, tire production, and aerospace. Those are now mostly or entirely gone. Silicon Valley employs only tiny numbers of tech geniuses; the actual manufacturing is done elsewhere. California’s unemployment rate tops 10 percent, in contrast to less than 8 percent for the nation as a whole. A full third of Americans on public assistance reside in California, even though it houses only one-eighth of the nation’s population. It is safe to say that only the very rich and the very poor​—​along with the 1.8 million who collect state and local government paychecks (some of the highest in the nation, according to the Census Bureau) and belong to powerful public-employee unions​—​can afford to make their homes in the Golden State these days. In short, California is the new Massachusetts. Or, given that it now has the worst state credit rating in America, thanks to chronic overspending, massive state debt, and the clout of the pension reform-resisting unions, California is the American Greece.

Until the passage of Proposition 30 last week, California voters had for more than two decades consistently rejected every general taxation measure put before them​—​and going directly to the voters on tax measures is fairly common in California, because the state constitution requires a hard-to-attain supermajority of two-thirds for a tax bill to pass the state legislature. The last time a tax measure on the general ballot had passed was in 1988, when California voters approved a cigarette levy​—​essentially a “vice” tax​—​aimed at funding antismoking and environmental programs. This November, however, voters agreed to raise the state sales tax to 7.5 percent from 7.25 percent, which means that consumers in, say, Los Angeles County, which has its own local sales tax, will be paying close to 10 percent in taxes on every item they purchase, save for groceries. Proposition 30 also includes a soak-the-rich so-called millionaires’ tax with an Occupy Wall Street flavor that hits people with household incomes of more than $250,000 a year, the same group that is President Obama’s target for raising federal income taxes. State rates for that 3 percent of Californians, many of whom own small businesses but are taxed as individuals, will rise to anywhere from 10.3 percent to 13.3 percent for those earning more than $1 million a year. Living in California has suddenly become even more expensive than it already was, especially for lower-income people on tight budgets, for whom every dollar paid out in sales taxes is a dollar that can’t be spent on something else. The tax increases are billed as “temporary”​—​if seven years for the income-tax hike and four years for the sales-tax hike can be called temporary.

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