The state is fighting to keep hold of its super-rich taxpayers
Just a year ago California Governor Gavin Newsom could, and did, brag about the state’s estimated $100 billion surplus. Flush with cash, the preening presidential hopeful was able to hand out thousands of dollars of goodies to households while financing an elaborate multi-billion dollar climate change agenda.
Now the state faces a budget deficit of at least $25 billion, which could grow to $35 to $50 billion if there’s a deep recession. Part of the problem lies with the end of federal Covid spending, but more to blame is the utter dependence of the state on tech billionaire taxpayers and high property prices. These are the top 1% of earners, who pay roughly half of the state’s income taxes.
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Thanks to a booming tech industry, these oligarchs made a killing that also allowed them to finance California’s profligate state budget. But as revenue from this industry has dried up this year, the crisis is more immediate. Property values are dropping faster in California’s three largest metros than the rest of the country, and even San Francisco’s once thriving business district faces persistent vacancies. Meanwhile new tech IPOs, a critical source of revenues, are suffering their biggest decline in two decades while Hollywood is enduring layoffs at Disney and other companies. In 2022, stock in media companies lost $500 billion in value, while those at tech firms haemorrhaged an astounding $4 trillion.
Worse for Newsom, this turnaround does not reflect a national phenomenon. Gregg Abbott’s Texas and Ron DeSantis’s Florida have achieved large budget surpluses, with several red states even initiating tax cuts. If the situation does not change, the contrast could prove devastating to Newsom’s presidential ambitions as well as to President Joe Biden, whose policy agenda largely follows progressive California lines.
The key to California’s travails lies not in other state’s stars, but in its own failing. California’s single-minded climate jihad — in addition to onerous labour regulations — has driven investment and people out of the state. Indeed, investment in rocket, battery, electric vehicle and semiconductor plants that may once have fitted naturally in the Golden State is now going to the likes of Ohio, Florida, and Texas.
Any attempt to restrain spending will be painful for Californians who have grown reliant on an expansive welfare state. The state already suffers from the worst housing affordability in the country. What’s more, in 2022 California suffered some of the lowest personal income growth rates in the country, and its GDP grew at less than half the pace of its arch-rival, Texas.
Yet as the poor and working class suffer, those leaving at record levels are not all impoverished campesinos, but increasingly middle-income, middle-aged families — the people once central to the California dream.
An even greater immediate concern is the loss of the wealthy. Until recently, California was able to hold onto its bevy of rich taxpayers — unlike New York, Illinois and other basket cases — due to its vibrant venture economy, pleasant weather and beautiful cities. But in 2020, California lost $17.8 billion in personal tax revenues, a figure bested only by New York.
It is dawning on people, including the super-rich, that California is losing its lustre — and losing it fast.