How not to run a state

[DeepGreen]

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The Land of Fruits & Nuts just gets nuttier. They just can't figure out that high taxes & over-regulation kills business, jobs, & investment.

California Disinvestment Accelerates

By Kevin Brekke

Poor California. The land of dreamin' in the '60s has awakened from a long slumber to find itself at the bottom of a dog pile of bummed-out karma. That the state is once again being steered by Gov. Jerry "Moonbeam" Brown is an irony not lost on the hopeful denizens of a once-great state looking for redemption. Yet, deliverance from the economic and regulatory sins of several past decades will not be easy.

The recent passage of a budget in California at the eleventh hour includes the usual mix of budget cuts, tax increases, and questionable accounting. It also places a heavy reliance on accurate tax revenue estimations that carry penalties should the state fail to meet them. The budget will ultimately stand or fall on the expectation by legislators that the state will capture $4 billion in tax collections beyond the previous estimate. If this wish upon a star does not come true, the budget will get whacked by another $2.6 billion.

A Bad Assumption

Missing from the entire budget process and estimation game is an examination of a crucial assumption: that the tax base will remain stable. That is, will the number of overburdened taxpayers and businesses that foot the bill for all the spending remain fairly constant? Evidence is mounting that the answer is "no."

I covered this question in previous articles that take a look at how a state should not be run. A synopsis of the theme would read:

Today, there are multiple combat lines being incised between a number of fiscal, economic, as well as ideological forces. Of all the various combatants, the U.S. states are emerging on the frontlines of the fight. And some of their tactics are encouragingly following free-market principles. Recent events suggest that a battle for tax revenue has commenced, pitting high-tax states against low-tax states.

Those "recent events" refer to falling - or a stunted rise in - state corporate-tax revenue and back-of-the-pack growth performance in gross state product, population, employment, and overall tax receipts in high-tax states such as California.

Another dog just landed on this pile of bad news courtesy of Joseph Vranich, publisher of The Business Relocation Coach blog out of Irvine, California and a consultant who tracks the movement of businesses. His latest research on California concludes:

Today, California is experiencing the fastest rate of disinvestment events based on public domain information, closure notices to the state, and information from affected employees in the three years since a specialized tracking system was put into place.

• From Jan. 1 of this year through this morning, June 16, [California] had 129 disinvestment events occur, an average of 5.4 per week.

• For all of last year, we saw an average of 3.9 events per week.

• Comparing this year thus far with 2009, when the total was 51 events, essentially averaging 1 per week, our rate today is more than 5 times what it was then.

Our losses are occurring at an accelerated rate. Also, no one knows the real level of activity because smaller companies are not required to file layoff notices with the state. A conservative estimate is that only 1 out of 5 company departures becomes public knowledge, which means California may suffer more than 1,000 disinvestment events this year. The capital directed to out-of-state or out-of-country, while difficult to calculate, is nonetheless in the billions of dollars.

The full list of companies that have announced plans to disinvest in California is available via the above link, as well as other dismal data about the current condition of business regulation in the state.

It is worth noting that a disinvestment event entails more than simply a business packing up and heading elsewhere. There are several actions that a company can pursue that are detrimental to the state, and Vranich breaks them down into the following six categories:

• Construction of a facility is cancelled due to California's costs, taxes, or environmental regulations.

• Full or partial closure. Work shifted to competitors who will perform the work out of state.

• Capital directed to out-of-state growth that in the past would have occurred in California.

• Company considered moving into California but went elsewhere, a decision termed a "U-turn."

• California lost a new facility to another state or country.

• Out-of-state relocation.

Where Is Everybody Going? And Why?

The top destinations for company relocation or diverted investment include: Arizona, Colorado, Florida, Georgia, Michigan, Nevada, North Carolina, Texas, Utah, and Virginia. Mexico, Canada, and India also made the list. It is no coincidence that some of the states listed here are also routinely ranked as low-tax states by third-party research organizations.

The decision-makers at the companies were interviewed and asked what factors led to a determination to leave the state or redirect investment. Not surprising that, again, taxes and regulatory burdens rank as a significant deterrent. Other incentives to look outside the state include: expensive location; dreadful legal fairness to business; and an excessively adversarial business climate. Chief Executive magazine calls California the "Venezuela of North America."

And as if it was needed, a new incentive for businesses to leave the state was enacted on April 12, 2011, in the form of a new law requiring utilities to acquire one-third of their power from renewable sources within nine years. California is already home to electricity rates twice the national average. Rates are estimated to increase from 19% to 74% when the new regulation is fully implemented. Further, the upcoming "California Global Warming Solutions Act" has the potential to place overwhelming hurdles that do not exist in other states and countries in front of local companies.

The good news is that California continues to set the standard on how not to run a state. It's an example that other states are paying attention to and plying the dunderheaded decisions of California legislators to their advantage. Free-market competition between states for business investment, and hence jobs, is under way, and will absolutely intensify as budget deficits squeeze a growing number of U.S. states.

A similar scenario is likely in play for individual California taxpayers as well, although statistics on this are hard to come by. As employers flee the state, it seems logical that job seekers will follow. And as the tax burden for funding government grows faster than the tax-paying population, look for a greater number of taxpayers to become former California taxpayers. The time for dreamin' is long past. It is the dawning of a new tax age for state governments.

[EagleMBA]

For people who seem to fancy themselves as highly intelligent, Californians just never seem to "get it". It is probably not because there are not intelligent people left in California but because they have just lost control of the ballot box to the something-for-nothing crowd.

Good article!

[UNTFan23]

Link

[SCREAMING EAGLE-66]

For people who seem to fancy themselves as highly intelligent, Californians just never seem to "get it". It is probably not because there are not intelligent people left in California but because they have just lost control of the ballot box to the something-for-nothing crowd.

Good article!

---Some in Texas don't get it either... in 1999 we had a $6 Billion surplus (Bush Gov. and Laney/Bullock controling legislature) ..... Perry walked in after the 2000 Presidential election, gave away a lot of tax cuts to business, not ordinary citizens which pays sales etc. (mostly to contributors ones, three of which gave over $400,000 EACH to him last year, (legal in Texas not in national elections) and now we have a $25 billion problem despite the fact that Texas has the best economy of all 50 states. Blaming the economy makes sense in Wisconsin and many states ... it doesn't here in Texas especially with oil prices and employment figures very good in most areas. So who gets to pay for this mess.. education... losing 1000's of jobs and having larger crowded classrooms... also many social services such as those for the physically and mentally handicaped.

[UNTFan23]

---Some in Texas don't get it either... in 1999 we had a $6 Billion surplus (Bush Gov. and Laney/Bullock controling legislature) ..... Perry walked in after the 2000 Presidential election, gave away a lot of tax cuts to business, not ordinary citizens which pays sales etc. (mostly to contributors ones, three of which gave over $400,000 EACH to him last year, (legal in Texas not in national elections) and now we have a $25 billion problem despite the fact that Texas has the best economy of all 50 states. Blaming the economy makes sense in Wisconsin and many states ... it doesn't here in Texas especially with oil prices and employment figures very good in most areas. So who gets to pay for this mess.. education... losing 1000's of jobs and having larger crowded classrooms... also many social services such as those for the physically and mentally handicaped.

You can have better unemployment numbers than other states and still have a sagging state economy. If people are afraid they could lose their jobs, they tend not to spend as much money. Only recently have some areas within Texas have started to see positive trends in sales tax collections. The US consumer is still in hibernation and will likely stay there until unemployment starts to actually move downwards rather than hover around 9%, which is where it has been for about the past year and a half.

[DoubleEagle]

---Some in Texas don't get it either... in 1999 we had a $6 Billion surplus (Bush Gov. and Laney/Bullock controling legislature) ..... Perry walked in after the 2000 Presidential election, gave away a lot of tax cuts to business, not ordinary citizens which pays sales etc. (mostly to contributors ones, three of which gave over $400,000 EACH to him last year, (legal in Texas not in national elections) and now we have a $25 billion problem despite the fact that Texas has the best economy of all 50 states. Blaming the economy makes sense in Wisconsin and many states ... it doesn't here in Texas especially with oil prices and employment figures very good in most areas. So who gets to pay for this mess.. education... losing 1000's of jobs and having larger crowded classrooms... also many social services such as those for the physically and mentally handicaped.

Couple of points here:

1. During Perry's tenure, business taxes have INCREASED from $1.9B (3.6% of total state revenue) to $3.9B (or 4.4% of total state revenue). Any way you look at it, business taxes have gone up, not down.

2. Perry's most significant tax legislation was a 2006 bill which decreased SCHOOL property tax rates (paid by us ordinary citizens) by 33%.

The problem, which was created by the 2006 tax reform act, is that business taxes did not increase enough to offset the decrease in school related property taxes. Any spending cuts to offset this deficit are naturally going to come from education and health & human services as those two line items represent 76% of total State spending.

As a side note, since Perry took office the State of Texas has CREATED 1.2 million jobs, representing an increase of 12.4%. At the same time the rest of the nation has SHED 2.6 million jobs, representing a decrease of 2.1%. (source: US Bureau of Labor Statistics)

[GreenBat]

Couple of points here:

1. During Perry's tenure, business taxes have INCREASED from $1.9B (3.6% of total state revenue) to $3.9B (or 4.4% of total state revenue). Any way you look at it, business taxes have gone up, not down.

2. Perry's most significant tax legislation was a 2006 bill which decreased SCHOOL property tax rates (paid by us ordinary citizens) by 33%.

The problem, which was created by the 2006 tax reform act, is that business taxes did not increase enough to offset the decrease in school related property taxes. Any spending cuts to offset this deficit are naturally going to come from education and health & human services as those two line items represent 76% of total State spending.

As a side note, since Perry took office the State of Texas has CREATED 1.2 million jobs, representing an increase of 12.4%. At the same time the rest of the nation has SHED 2.6 million jobs, representing a decrease of 2.1%. (source: US Bureau of Labor Statistics)

If all this is true, and I'm not doubting your figures, why is there such a budget shortfall and why are they cutting money from the schools?

[KRAM1]

If all this is true, and I'm not doubting your figures, why is there such a budget shortfall and why are they cutting money from the schools?

Most of his comments related to the revenue side...expense side is also part of the equation. You can be doing much better as a state than most other states and still have revenue/expense mismatches. When you spend more than you take in, something has to give. It really isn't as hard as our politicians (state and local) want you to think it is...

[CMJ]

In California it's actually harder - because so much of the budget is out of the hands of the legislature. A ridiculous percentage of the budget is pre-decided by ballot measure here.

Edited July 8, 2011 by CMJ

[yyz28]

I California it's actually harder - because so much of the budget is out of the hands of the legislature. A ridiculous percentage of the budget is pre-decided by ballot measure here.

THIS. ...exactly why a direct democracy can be a Fail - once the people figure out they can vote and get goodies for themselves, a direct democracy fails.

[KRAM1]

Heavy entitlement states always fail in the long run. Once you give up personal responsibility for the government handout the result is never good long term. Note the failure of the "War on Poverty" as a prime example of how a well intentioned program ends up making matters much worse over the long-term.

[oldguystudent]

Heavy entitlement states always fail in the long run. Once you give up personal responsibility for the government handout the result is never good long term. Note the failure of the "War on Poverty" as a prime example of how a well intentioned program ends up making matters much worse over the long-term.

I'm gonna go with these as my top reasons for California's failures:

1) Prop 13 -- Nobody in their right mind has paid property tax of any value since 1978.

2) The state's inability to recognize that it hasn't taken in revenue of any value since 1978.

3) Voter referendums that allow anybody to put anything on the ballot to be passed as law upon successful voting.

4) State employee unions that don't realize the state hasn't taken in revenue of any value since 1978.

5) California state legislature leveraging itself to the hilt on the promise of annuitized tobacco settlement money in 2003.

To be honest with you, the entitlements I assume you speak of (food stamps, medical, etc.) are not much greater than in Texas. There are just innumerable interest groups who have weaseled and embedded themselves into the state coffers come hell or high water.

[UNTflyer]

---Some in Texas don't get it either... in 1999 we had a $6 Billion surplus (Bush Gov. and Laney/Bullock controling legislature) ..... Perry walked in after the 2000 Presidential election, gave away a lot of tax cuts to business, not ordinary citizens which pays sales etc. (mostly to contributors ones, three of which gave over $400,000 EACH to him last year, (legal in Texas not in national elections) and now we have a $25 billion problem despite the fact that Texas has the best economy of all 50 states. Blaming the economy makes sense in Wisconsin and many states ... it doesn't here in Texas especially with oil prices and employment figures very good in most areas. So who gets to pay for this mess.. education... losing 1000's of jobs and having larger crowded classrooms... also many social services such as those for the physically and mentally handicaped.

I fail to follow your oil price logic. Why would oil prices benefit the Texas state budget in any significant manner? The state has no income tax, so corporations pay no taxes. In fact, you can argue that higher oil prices encourage drivers to drive less, which have the effect of reducing the state's total gas tax revenue.

But... California and Texas. Two extremes in terms of state financing. If the equal end result are two states with deficit issues, then what is better? A state deficit with high unemployment and falling business activity? Or a state deficit with low unemployment and increasing business activity? I think we all agree the latter is better, all else being equal.

However, let these two states demonstrate that the best solution probably lies somewhere in the middle (but leaning more toward the Texas Way).

Edited July 8, 2011 by UNTflyer