w a l l s t r e e t j o u r n a l o p i n i o n
Michael J. Boskin and John F. Cogan
•
California’s Greek Tragedy
Hoover Institution
•
Stanford University
by Michael J. Boskin and John F. CoganMarch 13, 2012Long a harbinger o national trends and an incubator o innovation, cashstrappedCaliornia eagerly awaits a temporary revenue surge rom Facebook IPO stock options andcapital gains. Meanwhile, Stockton may soon become the state’s largest city to go bust.Call it the agony and ecstasy o contemporary Caliornia.Caliornia’s rising standards o living and outstanding public schools and universities onceattracted millions seeking upward economic mobility. But then something went radicallywrong as Caliornia legislatures and governors built a welare state on high tax rates,liberal entitlement benets, and excessive regulation. The results, though predictable,are nonetheless striking. From the mid1980s to 2005, Caliornia’s population grew by 10million, while Medicaid recipients soared by seven million; tax lers paying income taxesrose by just 150,000; and the prison population swelled by 115,000.Caliornia’s economy, which used to outperorm the rest o the country, now substantiallyunderperorms. The unemployment rate, at 10.9%, is higher than every other state exceptNevada and Rhode Island. With 12% o America’s population, Caliornia has one third o the nation’s welare recipients.Partly due to generous union wages and benets, inexible work rules and lobbying ormore spending, many state programs and institutions spend too much and achieve toolittle. For example, annual spending on each Caliornia prison inmate is equal to an entiremiddleincome amily’s atertax income. Many o Caliornia’s K12 public schools rank poorly on standardized tests. The ununded pension and retiree healthcare liabilities o workers in the staterun Calpers system, which includes teachers and university personnel,totals around $250 billion.Meanwhile, the state lurches rom scal tragedy to scal arce, running decits in goodtimes as well as bad. The general und’s spending exceeded its tax revenues in nine o the last 10 years (the only exceptions being 2005 at the height o the housing bubble),abetted by creative accounting and temporary IOUs. Now, the bill is coming due. Aterrunning a $5 billion decit last year and another likely decit this year, Gov. Jerry Brown’sbudget increases spending next year by $7 billion and nances the higher spending withincome and salestax hikes. Specically, he’s proposing a November ballot initiative raisingthe state’s top income tax rate to 12.3%, making it the nation’s highest, and raising thebasic state sales tax rate, already the nation’s highest, to 7.75% rom 7.25%.A WALL STREET JOURNAL OP-ED
California’s Greek Tragedy
Michael J. Boskin and John F. Cogan
•
Caliornia’s Greek Tragedy
2 Hoover Institution
•
Stanord University
.
While Mr. Brown deserves credit or some earlier spending cuts to reduce a largeinherited budget shortall, the budget ails to address longrun structural problems,counting on a cyclical economic recovery and stock bubble or a bailout until thenext selinicted crisis. Moreover, he’s thus ar ailed to embrace a bold reormagenda to save money, improve services, and restore condence among the state’sbeleaguered taxpayers and bond holders. The ballot initiative’s $31 billion, multiyear “temporary” tax increase is larger thanthe “temporary” hike it replaces and its incometax hike is retroactive to Jan. 1, 2012.Worse, it doubles down on excessive reliance on highincome taxpayers, especiallytheir stock options and capital gains, which are taxed as ordinary income. Duringeconomic good times, it’s not unusual or the state to collect onehal o all incometax revenue rom the top 1%. This extreme progressivity leads to boombust cycles o rapidly rising revenue ollowed by complete collapse. Not surprisingly, the revenue isall spent on the upswing, orcing disruptive “emergency” cutbacks on the way down. The state’s progressive taxandspend experiment is broken, threatening basicservices, rom courts and parks to education and health care or its most vulnerablecitizens. Mr. Brown’s tax initiative only exposes the state to an ever more dangerousrollercoaster ride.No wonder many Silicon Valley CEOs say they won’t expand in Caliornia because o high taxes and burdensome regulation. And no wonder net migration has recentlyreversed, with hundreds o thousands o workers and their amilies leaving the statein search o better opportunities.Caliornia still ranks rst in technology, agriculture and entertainment among the 50states. But it is near the bottom in business and tax climate and state bond ratings.It’s a complex picture, but at its core is the hightax welare state run amok.Many Americans ear the ederal scal train wreck will turn us into Greece. But,barring major change, they need look no urther than Caliornia to see what thisuture portends. Relying on everhigher taxes to und payments to an outsizedpopulation o benet recipients is a recipe or exporting prosperity. That is oneCaliornia trend that other states emulate at their peril.No one should write o Caliornia. It still has great strengths. And it can turn some o its shortterm challenges, such as the pressures rom ethnic and linguistic diversity(the state is now 37% Hispanic and 13% Asian), into longterm strengths in the globaleconomy. But the political class must ace up to the reality that services will haveto be ar more careully targeted; the tax system overhauled with lower rates on abroader base o economic activity and people (almost hal o all Caliornians pay no
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California's Greek Tragedy, by Michael J. Boskin and John F. Cogan
Appeared in the Wall Street Journal March 13, 2012.
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