The California Legislature will be back in business on Monday Jan. 7. As the new and returning legislators prepare for legislating a very damaged California, I recommend they read “Rich States, Poor States,” published by the American Legislative Exchange Council.
Prosperity is no laughing matter when the fate of a state is on the line. The numbers don’t lie. With 50 years of solid economic data, what makes a state prosperous is as evident as what kills a state’s economy.
California is not dead yet, and the fate of the state can be determined by the 2013 Legislature.
ALEC looks ahead
Jonathan Williams, one of the authors of the 2012 “Rich States, Poor States,” told me recently that with a few smart, pro-growth policy changes, California could get back in the game and be the economic leader it once was.
But if the state’s leaders do not make some immediate, dramatic structural moves, the dismal economic forecast will overshadow the stunning weather forecast, and could eventually turn California into the least desirable state in the union.
Taxing the way to failure
States with low or no income tax outperform high tax states in across-the-board gross state product growth, population growth, job growth, and even in tax revenue growth, according to Art Laffer, Stephen Moore and Jonathan Williams of the . They recently co-wrote the fifth edition of “Rich States, Poor States,” an economic competitiveness index of American states.
Why then did California Gov. Jerry Brown, together with a Democratic supermajority in the state Legislature, push for even more and higher taxes?
The Laffer Curve proved many years ago that, if tax rates become too high, they lead to a reduction in overall tax revenues. But an economically sound tax system with a broad base and lower tax rates leads to statewide prosperity.
“When you tax something more, you get less of it, and when you tax something less, you get more of it,” they wrote. “Taxes create a wedge between the cost of working and the rewards from working.”
“Be more like Texas and less like California”
“Texas versus California has become the most stark example,” said Rich States, Poor States author Jonathan Williams. “The left wing tries to impune Texas, but the job creation, low unemployment, income growth and GDP growth is undeniable.”
“California has become the primary example of how not to govern a state,” Laffer, Moore and Williams said. And sadly, California has become a shadow of its former economically vibrant self.
Besides just dropping from the fifth largest economy in the world, California has suffered a net loss in domestic migration. ALEC predicts that this economic decline is not going to end any time soon.
So what should California do?
“A state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country,” said U.S. Supreme Court Justice Louis D. Brandeis.
Sadly, California’s experiment is not only failing, it is impacting the rest of the country.
Good weather is not enough
“Over the last 20 years, 3.6 million more Americans have moved out of California than have moved in, and 130,000 more Americans have moved from Hawaii than to it,” Rich States, Poor States reported.
Yet every year California legislators brag openly about how the good weather trumps economic policy and low taxes.
“This is too stark to deny, particularly as it relates to regulatory policy in states,” Williams said. “And, we will never know how many people and businesses decided not to move to California.”
Beautiful weather may attract tourists, but if the economic policy isn’t sound, even the beautiful states can’t keep or attract residents. “California charges a premium for nice weather,” Williams said.
Residents of California’s coastal communities may turn their noses up at North and South Dakota, and mock anyone wanting to move there, but Williams said that with the strong economic policies, the Dakotas have a 2.9 percent unemployment rate. This has led to a new house building market that can’t keep up with the rising demand. “Capital is blind to weather. The numbers don’t lie,” Williams added.
Alaska has one of the harshest climates in the entire Western Hemisphere, but according to the authors, Alaska is performing better economically than California and Hawaii.
Hawaii has the highest state income tax in the country, and California’s high taxes and penalizing regulations drive people away. Alaska however, has no state income tax.
The authors of Rich States, Poor States found that over the last 10 years, more than 4.2 million people have moved out of the highest income tax states, and states with the highest local tax burdens.
To reform or not to reform? That is the question.
Pension reform is a key component of a state’s economic health. Moore, Laffer and Williams contrasted Illinois and Wisconsin, and found starkly different approaches and results.
Wisconsin Gov. Scott Walker tackled his state’s $3.6 billion budget deficit by facing pension reform as part of a multi-faceted reform plan. While his plan was met with historical protesting from labor unions, Walker eventually succeeded, and Wisconsin is well on the way to economic prosperity. The pension system is also now fully funded.
However, Illinois has rebuffed all attempts at pension reform, carrying a pension liability of anywhere between $54 billion and $192 billion, according to Rich States, Poor States. Instead of putting reform policies in place, Illinois increased corporate and personal income taxes, which according to ALEC, merely went to the pension liability debt.
Similar to California, Illinois has experienced a downgrade to its credit rating, resulting in many Illinois businesses moving to Wisconsin to escape increasing business taxes.
Other responsible states are getting results
Rich States, Poor States reported some good news:
* Ohio Gov. John Kasich, a Republican, closed a massive budget shortfall without a tax increase.
*Nebraska Gov. Dave Heineman reduced the inheritance tax as well as income and corporate tax rates.
*New Hampshire and Tennessee are both considering constitutional amendments to ban personal income tax.
* The Iowa Legislature proposed to cut its property tax.
* New Mexico Gov. Susana Martinez eliminated the gross tax receipts for businesses earning $50,000 or less, is working to end double and triple taxation, and plans on introducing pension reform in 2012.
* Kansas Gov. Sam Brownback, a Republican, has a plan to phase out the income tax over the next decade. In the meantime, Brownback has reduced the tax rate from 6.45 percent to 4.9 percent. Compare that to California’s 10.30 percent top personal income tax rate in California.
Prosperity is one reform policy away
California has implemented no real reform, nor does Democratic Gov. Jerry Brown seem interested in making any of these pro-growth economic moves. If Brown merely adopted the tax reform policies of Kansas, California would see immediate improvement in the business sector, job growth and unemployment rate.
Williams said that since they published Rich States, Poor States, Kansas flattened the income tax, dropped three tax brackets to two, lowered the income tax rate from 6.45 percent to 4.9 percent, and eliminated personal income tax for small business owners.
“This pro-growth policy would put California back in play, and jump start the economy,” Williams said. “It would tell the entire country that the private sector still matters… that competition matters.”
California is gaining in population but losing in economic market share and competitiveness. “California must do one or the other; you can’t print money, so the state must do pro-growth at some point.”
Intel CEO Paul Otellini recently told the Wall Street Journal that Intel has not added a job in California in 10 or 12 years and closed its last factory in the state around six years ago. “Oh God. I was born and raised here. I’m fifth or sixth generation. It’s one of the nicest pieces of real estate on the planet, and we’re so close to screwing it up, it’s pathetic,” Otellini said. “I’d like to be bullish, but I worry that we have to hit the abyss before we can fix things, and I worry that the abyss will be more like Greece.”