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California's Greek Tragedy, by Michael J. Boskin and John F. Cogan

California's Greek Tragedy, by Michael J. Boskin and John F. Cogan

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Published by Hoover Institution
Appeared in the Wall Street Journal March 13, 2012.
Appeared in the Wall Street Journal March 13, 2012.

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Published by: Hoover Institution on Mar 30, 2012
Copyright:Attribution Non-commercial


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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, cashstrappedCaliornia 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 Caliornia.Caliornia’s rising standards o living and outstanding public schools and universities onceattracted millions seeking upward economic mobility. But then something went radicallywrong as Caliornia legislatures and governors built a welare state on high tax rates,liberal entitlement benets, and excessive regulation. The results, though predictable,are nonetheless striking. From the mid1980s to 2005, Caliornia’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.Caliornia’s economy, which used to outperorm the rest o the country, now substantiallyunderperorms. The unemployment rate, at 10.9%, is higher than every other state exceptNevada and Rhode Island. With 12% o America’s population, Caliornia has one third o the nation’s welare recipients.Partly due to generous union wages and benets, inexible work rules and lobbying ormore spending, many state programs and institutions spend too much and achieve toolittle. For example, annual spending on each Caliornia prison inmate is equal to an entiremiddleincome amily’s atertax income. Many o Caliornia’s K12 public schools rank poorly on standardized tests. The ununded pension and retiree healthcare liabilities o workers in the staterun Calpers system, which includes teachers and university personnel,totals around $250 billion.Meanwhile, the state lurches rom scal tragedy to scal arce, running decits 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. Aterrunning a $5 billion decit last year and another likely decit this year, Gov. Jerry Brown’sbudget increases spending next year by $7 billion and nances the higher spending withincome and salestax hikes. Specically, 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
Caliornia’s Greek Tragedy 
2 Hoover Institution
Stanord University
While Mr. Brown deserves credit or some earlier spending cuts to reduce a largeinherited budget shortall, the budget ails to address longrun structural problems,counting on a cyclical economic recovery and stock bubble or a bailout until thenext selinicted crisis. Moreover, he’s thus ar ailed to embrace a bold reormagenda to save money, improve services, and restore condence 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 incometax hike is retroactive to Jan. 1, 2012.Worse, it doubles down on excessive reliance on highincome 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 onehal o all incometax revenue rom the top 1%. This extreme progressivity leads to boombust 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 taxandspend 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 dangerousrollercoaster ride.No wonder many Silicon Valley CEOs say they won’t expand in Caliornia 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.Caliornia 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 hightax welare 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 Caliornia to see what thisuture portends. Relying on everhigher taxes to und payments to an outsizedpopulation o benet recipients is a recipe or exporting prosperity. That is oneCaliornia trend that other states emulate at their peril.No one should write o Caliornia. It still has great strengths. And it can turn some o its shortterm challenges, such as the pressures rom ethnic and linguistic diversity(the state is now 37% Hispanic and 13% Asian), into longterm strengths in the globaleconomy. But the political class must ace up to the reality that services will haveto be ar more careully targeted; the tax system overhauled with lower rates on abroader base o economic activity and people (almost hal o all Caliornians pay no

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