California’s budget deficit spells trouble
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.
A bit of a cliche I know but isn’t it a case of “ Go woke go broke”?
It’s a cliché because it’s true.
Yes a saying that I use a lot on MSN… heavens they still allow me to say it on their super censured forum.
To achieve social peace despite extreme wealth inequlities, as in Seoudi Arabia, California created a theocracy with a large clercial class. A woke theocracy instead of a wahabi theocracy, but a theocracy nonetheless.This worked for enforcing the social contract, providing a common and officailly enofrced narrative.
The wahabi clerics are intelligent enough to not sabotage the oil industry, and assume their role of preserving social peace even if using authoritarian methods
The woke clercis sabotages the univesities, tech, industrial hubs, media and quality of life that made California wealth.They do this through fatwas (aka regulations) and taxes (an almost unknown word in Seoudi Arabia)
No sympathy for the woke clergy
Well stated. It also helps to have a fully compliant national media, which never reports on the negative and lies about what’s behind the curtain. This results in very conservative minded people voting for the complete opposite out of fear of being “wrong” about the approved narrative.
Excellent comparison, curious spelling notwithstanding.
Build it and they will come, tax it and they will go.
‘These are the top 1% of earners, who pay roughly half of the state’s income taxes‘
This is just not sustainable. States cannot be dependent on such a tiny percentage of the population like this. We have a similar situation in the UK where only about half of working age people pay income tax.
No representation without taxation.
“It’s time that the rich pay their fair share!” shout the placard waving, red faced, ignorant masses, along with every democrat who ever runs for an office. But no one ever says what fair share means.
Indeed, California’s vanishing middle class is being taxed out of existence. The sanctuary state’s huge undocumented population battens on social welfare and pays almost no tax at all. Utterly unsustainable.
More and more people are saying, you can go to hell and I will go to Texas
The big problem of course is, the clowns who leave California then start to turn their new homes into California
And tidal waves couldn’t save the world from Californication
Economic collapse of California is one of the few things that can really turn the tide against progressivism, imo. For the reasons summarized in the article, that collapse will probably only occur if tech abandons the state en masse. Because of its deep roots there, I’m not yet convinced that big tech will abandon the state.
California’s government has worsened year after year for at least the past twenty years. Each year people say the situation is unsustainable, but year after year things get worse and California somehow keeps rolling along. I don’t know why most people still live there, to be honest. I used to live there for a while but wouldn’t go back.
I suspect we’re witnessing the gradual collapse of the Golden State. There won’t be a final big bang, just a weary slump into something that looks uncomfortably like the poorer parts of Mexico. So far there’s barely a hint that Californians are willing to restore their formerly glorious state.
“big tech will abandon the state” – many of the employees were working remote. A high salary can’t keep up with ever higher rents. The layoffs might be on those who were remote by choice. Those remaining are crushed by increasing taxes.
They stay because of the climate.
California is fast becoming America’s own failed state.
California, the land of fruits and nuts
The impact of the state’s labor regulations on businesses cannot be understated. They are truly insane, each year there are probably over a dozen new ones passed, and one of the latest is pure woketrash madness.
SB 1162 requires employers to submit burdensome reports to the state with the race and gender of each employee or contractor identified, and their job classified according to 10 different categories with the “stated purpose is to allow the government to identify wage patterns reflecting unjustified pay inequality among the different ethnicities and genders, which in turn enables the goverto enforce equal pay and anti-discrimination laws more effectively in California. This is expected to result in more investigations and prosecutions against employers whose demographic pay data shows pay inequality.”
So if you have a company with a lot of diversity hires (which most CA firms do) with sub-par performance whom understandably don’t earn as much, the state may launch an civil rights investigation against your company in the name of “equity”.
It gets worse every year, and the religious fervor with which the state attacks businesses with burdensome new regulations and ever-shifting rules in the name of their woketrash ideology makes you want to give up and leave.
In this words of the state’s first partner…
“To achieve a California for ALL WOMEN, we must dismantle the patriarchal systems that have barred women from access to equal pay, secure housing, fair prices on goods, and support services and privacy after a sexual assault,” said First Partner Jennifer Siebel Newsom.
Mr. Kotkin forgets to mention that a lot of CA’s problems, from wokeism to off-the-wall climate panic legislation to tax-and-spend fiscal policy can be laid at the feet of the single-party death grip that the Democrats have on state government. But then again, I suspect he votes reliably Democrat…
And donates to them too, they all do
How does CA utterly depend on high property prices? To me, this is one of its biggest issues and it is going after those prices more aggressively now. You even mention high property prices are a headwind later in the article.
Prop 13 froze tax rates. I’m confused. Can someone highlight how CA “utterly depends” on high property prices or was this an author error?
Most people in the US move every 5 years. Each time the property is sold the gain on the sale is taxed. Prop 13 is only good if you stay in one place.
When I lived in the US, there was a capital gains exemption on your primary residence (up to USD$500.000 for married couples and USD$250.000 for singles).
Prop 13 protects seniors, and enables them to continue living in the homes they fairly earned and paid for. California’s brutal and generic new “housing element” requirement will put pressure on towns and suburbs to condemn and eminent domain out of existence such relics of family life. California has come to embody the old Missionary Hymn: “Where every prospect pleases, and only Man is vile.”
From this site: https://wise-answer.com/how-does-prop-13-affect-property-taxes/
“You can no longer transfer your Prop 13 basis to your children, except under limited situations, see below. This is potentially the largest property tax increase in California history… but it will only impact the next generations; this is a new death tax and inheritance tax on real property owners’ heirs.”
Tax RATES and assessed VALUES are two different things, which must be separated to understand this. You can freeze tax rates, but if the state keeps assessing your property as being worth more every year, you pay more tax every year.
What does Kotkin mean by “onerous labour regulations”? If he means workers’ rights, then it is no fault of California that other states have undercut them with poor or inadequate labour regulations. It means the other states need stronger unions and better legislation.
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