California Dream Becoming Nightmare for Many

Great article from the Hoover Institution, and the final excerpted paragraph on water is excellent.

An excerpt.

Californians long led an idyllic version of the American Dream: lots of sunshine, jobs, upward mobility, home and automobile ownership, inviting ample space and tremendous mobility.  Long a harbinger of national trends and an incubator of innovation, the Golden State used to be home to steadily rising standards of living, outstanding public schools and universities, and enviable infrastructure.

But then something went radically wrong: California legislatures and governors built a welfare state of high tax rates, liberal entitlement benefits, and excessive regulation.  That backfired into results far worse than just a parody of a progressive utopia. Rather than the European-style green socio-economic equality fantasized by California’s coastal liberal elites, for most Californians it has Europe’s relative economic stagnation and is heading toward South America’s inequality.

For the past three decades California has experienced excessive swings in its economy and financial fortunes that are far worse than in other states.  From the mid 1980s to mid 2000s (both in the middle of economic expansions), California’s population grew by 10 million. But the number of income tax payers rose by just 150,000.  Meanwhile the prison population soared, and MediCal (the state’s Medicaid program) recipients rose by 7 million in this pre-Obamacare Medicaid expansion period.  From the mid-2000s to the middle of the current decade, the population grew by about three-and-a-half million and the number on assistance programs grew apace.  With 12 percent of the nation’s population, California has almost a third of America’s welfare recipients. California’s 14 million MediCal recipients by themselves would constitute the fifth most populous state in the nation.

Under the Census Bureau’s most accurate measure, more than one in five Californians lives in poverty, by far the highest of any state; shockingly, California’s rate is 41% higher than Alabama, 49% higher than South Carolina and 28% higher than even higher cost of living New York. But it is not only a problem of the lower tail of the income distribution; middle-income Californians are struggling too. Surprisingly, median household income, when adjusted for household size and cost of living, is below the national average! While down considerably from the recession peak, currently only five states have a higher unemployment rate. More startling still, despite the remarkable technology and entertainment wealth, real disposable income per capita, what Californians on average have available to spend on all their family needs and save for their and their children’s future is 10th poorest of any state.

Partly due to generous union wages and benefits, inflexible work rules and special-interest lobbying, many state programs spend too much while achieving too little.  For example, the Legislative Analyst puts annual spending per each of California’s 120,000 prison inmates (8,000 housed out of state) at $71,000, more than twice the national average and far above the income of a middle-income family or a year of attending Harvard. Many of California’s K–12 public schools rank poorly on standardized tests.  The infrastructure has not kept up with population growth or even needed maintenance.  Unfunded pension liabilities of workers in the state’s CalPERS system run to several hundred billion dollars..

Last year, California’s voters approved a “temporary” twelve-year extension (Proposition 55) of the “temporary” seven-year tax hike approved by voters in the November 2012 election, enforced retroactively to the start of that year.  It raised the top marginal state income tax rate to 13.3 percent, the highest in the nation.  The original “temporary” tax hike was allegedly to help the state’s emergency funding needs, a rationale that doesn’t apply to the new extension.  As the great economist Milton Freidman quipped, “There is nothing so permanent as a temporary government program.”

Worse yet, the House Ways and Means Committee federal tax reform proposal circulating in Washington eliminates the deduction for state income taxes. That would drive up the effective top rate on Californians by two-thirds, from 8 percent netting federal deductibility to the full 13.3 percent. If it becomes law as is, with the top tax rate unchanged and elimination of the deduction, California would become more expensive for its high-income citizens, aggravating an exodus.

California’s spending is financed by what my Hoover colleague John Cogan and I have previously called “casino budgeting,” as it relies  heavily on upper-income taxpayers, especially their highly volatile stock options and capital gains, which are taxed as ordinary income.  During economic booms and bull markets, revenue flows in at astounding rates; half of all income tax revenue comes from the top 1 percent.  This extreme progressivity feeds the welfare state in good times but has a damaging downside.  Periods of rapidly rising revenues are followed by complete collapse, as the capital gains and stock options of the top 1 percent plunge.  For example, in the 2009 recession, gross state product (the state equivalent of a nation’s GDP) fell 3.7 percent, but revenue plummeted 23 percent and the top 1 percent income share declined from 48 percent to 37 percent.  But because the revenues are all spent—and often even more committed—on the upswing, disruptive emergency cutbacks, often in services for our most vulnerable citizens, are inevitable on the way down. Also victimized are counties and towns, which are asked to shoulder increased responsibilities without accompanying resources.  A court-ordered reduction in the state’s prison population, for example, wound up shipping inmates to local jails.  The state’s progressive tax-and-spend culture episodically starves vital services, from courts and parks to education and health care.  The state desperately needs a less volatile revenue model, such as that suggested eight years ago in this report from the bipartisan Commission on the Twenty-First-Century Economy, of which Cogan and I were members.

The time to prepare for the next downturn is during the boom, not after it ends, turning dreams into nightmares.  California needs a less volatile, more prudent tax structure with lower rates on a broader base of economic activity and people (almost half of all Californians pay no income tax). Inefficient state programs must be reformed to produce far better outcomes while spending less. Infrastructure spending should be redirected to maintaining and upgrading roads and ports, not giant new boondoggles.

Although the water infrastructure needs upgraded storage and transport capacity, far greater reliance on water markets to efficiently allocate water to its most productive uses is the top priority and would reduce the needed additional spending. The governor’s twin Delta Tunnel plan, which he is trying to pressure the state’s water districts to support and pay for with rate increases, is an expensive way to deal with the problem of saving a tiny fish, the delta smelt, protection of which has had the state diverting desperately needed freshwater into San Francisco Bay and the Pacific Ocean, even during the drought. Unfortunately, the governor’s plan, despite good intentions, does not add needed water.  The plan is in deep trouble after the Westlands Water District, the largest agriculture water district in the state and the Santa Clara Valley Water District, the largest in Silicon Valley, overwhelmingly voted not to participate. Worse yet, California’s state auditor ripped repeated “significant cost increases and delays” and the failure to complete “either an economic or financial analysis to demonstrate the financial viability of the project.”

Retrieved January 23, 2018 from

About David H Lukenbill

I am a native of Sacramento, as are my wife and daughter. I am a consultant to nonprofit organizations, and have a Bachelor of Science degree in Organizational Behavior and a Master of Public Administration degree, both from the University of San Francisco. We live along the American River with two cats and all the wild critters we can feed. I am the founding president of the American River Parkway Preservation Society and currently serve as the CFO and Senior Policy Director. I also volunteer as the President of The Lampstand Foundation, a nonprofit organization I founded in 2003.
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