California, Here I Go!

That’s a take-off on a song that Al Jolson made famous in the 20’s called “California, Here I Come”. I was not around at that time but we’ve come a long way from then. So long in fact, that it now looks like we will be replaying that song in reverse. As I write this, Californians will be voting on six tax initiatives aimed at saving the State from utter bankruptcy.

It now appears that a reckoning may be here for the liberal tax and spend governance that has exemplified this State for many years. I predict that the voters, weary from this perennial gouging by public unions and special interests, will reject most of these initiatives to take more of their money. I hope this rejection will be the wake-up call needed to motivate real tax reform. Otherwise, the federal government will have another bailout on its hands, for surely California is too big to fail! It also poses an interesting question the Constitution never anticipated, “How does Washington take over a State?”

These are interesting times for many States that are now facing nearly a $100B budget deficit this year. Their “soak the rich” policies have created a mass exodus that leaves a vacuum of depleted jobs and a serious brain drain of entrepreneurs and small business. It illustrates that because people, capital, and businesses are mobile they will generally go to more tax-friendly locations when given the choice, particularly in these times.

The Great Tax Myth

The notion that increasing State taxes on the rich (>$200/yr.) provides more services, better schools, and improved infrastructure which in-turn attracts people and businesses is an utter myth. In fact, the opposite is true. The Wall Street Journal recently reported data from Richard Vedder of Ohio University which showed that from 1998-2007 more than 1,100 people a day moved from the highest income tax States such as California, New Jersey, New York, and Ohio and relocated mainly to nine tax haven States like Florida, Nevada, New Hampshire, and Texas. Also, these no-income tax States created 89% more jobs and had 32% faster personal income growth.

Take for example, New Jersey, a State where I lived from the age of 19-27. In the early 60’s the State had no income tax and no sales tax. It ran budget surpluses and attracted a variety of industries. Today its income and sales taxes are among the highest in the nation, yet it generates continuous deficits and its schools rank among the worst. We have seen similar trends over the years in California, where teacher’s unions have negotiated the highest salaries for classroom teachers, yet their schools have the second lowest test scores in the nation.

Let’s hope that politicians look at the Texas model which still has no State income tax and created more jobs in 2008 than all other 49 combined. It’s the economy, stupid, that generates revenues for services and growth, not the tax rate.

Good luck California, you’re beautiful but I don’t like your personality!