California Ugly

Soaking the rich isn't working on the left coast.

WSJ Opinion, May 14, 2012

It looks like that Facebook IPO may not be enough to save California's fisc after all. Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship to move to Singapore, which has no capital gains tax. And now we learn the Golden State's budget deficit will come in at $16 billion, up from a merely awful $9.2 billion estimate in January.

California Controller John Chiang reported last week that April tax collections were a gigantic 20.2%, or $2.44 billion, below 2012-13 budget projections. You have to admire Mr. Chiang's capacity for understatement as he noted that "revenues disappointed." Yes, and J.P. Morgan's whale trade was a $2 billion rounding error.

Among the biggest surprises is a 21.5% or nearly $2 billion decline in personal income tax payments from what Governor Jerry Brown had anticipated. This reinforces the point that when states rely too heavily on the top 1% of taxpayers to pay the bills, fiscal policy is a roller coaster ride.

California is suffering this tax drought even as most other states enjoy a revenue rebound. State tax collections were up nationally by 8.9% last year, according to the Census Bureau, and this year revenues are up by double digits in many states. The state comptroller reports that Texas is enjoying 10.9% growth in its sales taxes (it has no income tax), while California can't seem to keep up despite one of the highest tax rates in the land.

This would seem to suggest that California should try cutting tax rates to keep more people and business in the state, but Sacramento is intent on raising them again. Governor Brown and the public-employee unions are sponsoring a ballot initiative in November to raise the state sales tax by a quarter point to 7.5% and to raise the top marginal income-tax rate to 13.3% from 10.3%. This will make the state even more reliant on the fickle revenue streams provided by the rich.

Meanwhile, an analysis by Joseph Vranich, who studies migration of businesses from one state to another, finds that since 2009 the flight of businesses out of California "has increased fivefold due to high taxes and regulatory costs."

This month Chief Executive magazine reports that its annual survey of CEOs ranked California dead last among the 50 states in business climate. Texas was number one. The silver lining for Jerry Brown, if not for the California fisc, is that if you're already ranked 50th you can't get any lower—though he seems willing to try.