The Golden State was a magnet for people displaced during the Great Depression and the Oklahoma Dust Bowl. Now, the state legislature seems bent on driving its productive population away.
It was about five years ago when I had the opportunity to talk with an executive from a major California based winery about how the wine business was doing. My interest was sparked by the fact that so many people were getting involved in wind making; even a San Jose doctor i knew had bought land for growing wine grapes as a hobby. My executive said that the business was doing well, except that the expense of doing business was becoming too high. Taxes, government regulation, and mandated expenses such as worker's compensation were eating into their profits big time and the company was seriously considering moving much of their operation to Nevada. When I pointed out that Nevada didn't have a proper environment for grape growing he agreed, adding that it still would still be cheaper, under the present circumstances, to truck all the grapes out of state, and build a facility there, than to do it all right next door to the vineyards.
This wouldn't be interesting if it was an isolated incident, but California is facing a monster deficit, while people, especially wealthy people are leaving the state, taking human and investment capital with them. Because of this, the state is in trouble. When money and businesses leave a region, they take jobs with them and tax revenues follow. World Net Daily , gets right to the point by quoting Arkansas Governor Mike Faris; "States are in direct competition with each other for human capital and business investment. State governments that think they can attract jobs and people, and grow their economies, by taxing their citizens at a higher rate than their neighbors are sadly mistaken." Despite this, California's budget analyst believes that it is necessary to increase taxes. Governor Schwarzenegger has proposed an alternative 10% budget cut across the board, which is likely to be more effective in resolving the issue than raising taxes. After all, according to impartial statistics from moving companies, (see first link above) California is already driving people away. When we see that the population trend is away from high tax states and into low tax states, the conclusion is inescapable. Making the problem worse won't help. The Governor's plan, at least, won't give people more reasons to leave. The legislature should realize that it is never impossible to cut spending. All that is required is the will to do so. If they don't find that will, then, as my kindergarten teacher used to put it, "you aren't saying ‘I can't' you are saying ‘I won't'".
It has been some years since I embarked on my own very small crusade against the foolishness found in much of America's tax policies. It was sparked, in part by studies I undertook while completing an MS (Taxation) degree, and in part by the economic reality illustrated by the Kennedy tax cuts in the early 1960's, echoed by the Reagan tax cuts in the 1980's. This led me to another conclusion; that there are all together too many people in government who will not accept that in their zeal to provide all of the desired services and regulations to those who desire them, they are destroying their ability to provide any services at all. They would rather destroy the state they govern than accept its normal financial limitations.
When people leave an area due to government practices they disagree with it often called "voting with their feet." Such "voting" for economic reasons should be something that educated people understand, but it isn't always that way. California's present situation is one example. Another occurred here in Texas a few years ago when the Texas Realtors Political Action committee opposed suggested limitations on property taxes. The publicly stated reason was that lowering taxes would cause lower property values. This absurdity exists only when someone cannot see that two where essentially identical properties are taxed differently, the one with a lower tax would be more desirable. A potential buyer would almost certainly be willing to pay more for it, so that they can pay less in taxes. In financial terms, it is a variation on the present value of a future cash flow. Through the same analysis, we can see why a business would be more likely to locate where the costs are lower, hence the frequent showers of radio advertising that urges you to "incorporate in tax free Nevada."
The Golden State was a magnet for people displaced during the Great Depression and the Oklahoma Dust Bowl for a good reason. It offered opportunities that were not available elsewhere, and the influx of people helped build an economy second to none if the nation. Now, the state legislature seems bent on driving its productive population away and you can be sure that businesses will continue to go with them. Newt Gingrich illustrated a similar phenomenon happening to Michigan in Chapter 4 of his recent book, Real Change."
California's economy cannot survive only on wineries and motion picture studios. Fewer businesses mean smaller tax revenues and more unemployed people. Go too far and even Silicon Valley could disappear. Technology is portable. You can design and build computers anywhere, and there are many locations that would jump at the chance to take in businesses that choose to leave Santa Clara County. The folks in Sacramento should think long and hard about that before they decide that continuing to tax and spend themselves into oblivion is the way to go.
slaib@intellectualconservative.com
http://intellectualconservative.com
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Good essay by someone who understands the problems here in California. However, the impression that people are leaving the state in droves is perhaps overstated – California is still a magnet state for immigrants from the United States and the rest of the world. The reason has to do with the chief product of California – which contrary to the common joke isn’t fruits and nuts (or even vegetables) and isn’t wine or motion pictures either. The chief product of California is California itself.
The state has all the best features of the other U. S. regions and its citizens and our state government rulers intend to keep it that way. Within 3 hours from my home in the San Francisco area I can be skiing at some of the best resorts in the country, if not the world. All the pleasures of the snow country without the everyday hassle of living there – when the lifts close you can be back in the sunshine within a few hours. The ocean and endless miles of beach are less than 45 minutes away, although northern California waters are too cold for swimming, even during the hot months. The desert is 4 hours south as the turkey vulture flies. For many, the state is a Garden of Eden – even the homeless consider it a choice location as any tourist to San Francisco can testify.
What the state government has done, whether deliberately or not, is drive out the “dirty” industries with an unending deluge of regulations and prohibitions. Partly this can be attributed to the “enviro nuts” but that’s an excuse overused by conservative authors. The average person also benefits from the “only clean industries, preferably office parks” doctrine. Home prices increase year by year which rewards present homeowners more than any other area of the country and the home values benefit from an obvious lack of manufacturing plants, smokestacks, rail yards, truck depots, warehouses, pollution, etc.
California is different in that respect from Michigan, another natural beauty state – my brother purchased a home in Michigan 15 years ago and it’s worth less today than when he bought it. Such a disappointment is almost unheard of in California where home prices easily double and may triple within 10 years. The many homeowner communities are sparkling clean surrounded by parks and elegant landscaping – a winning combination of climatic and manmade beauty. Amateur baseball tryouts and soccer leagues started two weeks ago in many of our local communities and families are out in force to enjoy the sunny weather and watch some sports without those backbreaking admission prices.
The long term problem for the state is that you actually need local heavy industry – even the modern Garden of Eden needs petroleum refineries – which may explain why Californians have the highest gasoline prices in the lower 48 states. And this combination of high prices, high taxes and constantly increasing government costs is driving certain groups of people to leave the state along with the manufacturers, their service and supply industries and many of their employees.
The most obvious group leaving is retirees, either current or pending. You have the choice of either cashing out or keeping your family home as a solid business investment – an investment with an even better return than your 401-K. I have friends whose parents sold the home they originally purchased at $100,000 for $800,000 and then left for Arizona – emulating many of their friends who went to Oregon, Texas, Nevada – you name it. Once they leave, their income goes with them and most elderly people here don’t exist by living off social security checks and dining on cat food – social security doesn’t go far in California and cat food, like everything else, is expensive. With their market investments and cashed out home equity, they flee to a gentler tax and price locale, pulling their money and future taxes out of the state.
The other group leaving is young folks. When the neighborhood you grew up in is advertising starter homes at $700,000, a young, single person or married couple often choose to leave the state for greener pastures rather than move back in with mom and dad. The state loses its educational investment in these young folks, most of whom went to school in California, and their future incomes and the related tax revenues.
California is like a perpetual ponzi scheme. With our high home prices and cost of living, there won’t be another mass migration from Oklahoma or anywhere else in the United States. With the young folks moving out and other lower wage Americans reluctant to come here, the illegal immigrants have moved in – someone has to trim the bushes in the gated communities after all. But, everyone who can afford a home is sitting on a mountain (or at least a small hill) of home equity, hoping the bubble doesn’t burst until they can cash out and move away. And, as long as California can keep selling itself, new residents will arrive to keep the ponzi going. Everyone here is keeping their fingers crossed hoping the financial promise of the Garden will last their lifetime and The Big One won’t turn their property into a deserted beachfront.
Comment by Pat Skurka | February 25, 2008
I can only assume from reading Pat's article that he is a member of the California legislature.
Comment by hvance | February 25, 2008
Seems to me that the California bubble has a slow leak if it has not burst. Housing foreclosures are the highest in the nation since many followed Pat's lead in assuming that prices would always go up and they could flip properties effortlessly on the way to serious wealth. Hmmm
But what else is happening to drive the producers out of the state? Illegals consume much more than the pittance they contribute. For example let's take the illegal family with 3 children. We the people pay for education K-12 so at the national average that is $360,000 far more than they will ever pay in sales tax or property tax (via rental). It is unlikely they are paying any income tax, even if they have stolen an identity to file or used the infamous tax payer ID number, since the withholding on families with 8 children is nil (yes they do lie on the forms as well as steal identities). Then there are the other minor expenses for food stamps and medicaid to cover the anchors; free medical via the emergency room for all of the rest of the clan, other welfare benefits in California that doesn't bother to check actual eligibility.
Will California continue to loose mid to upper earners? Yes! Will the uneducated masses still come to California? Yes! Will California become a part of Mexico? Yes, thanks to GW's recognition of Kosovo it is now proper and legal for states to seceede from the Union. Looks to me like California is about to move to 4th world status.
Used to be a beautiful state. I will take my final visit there in April then watch as it is ceded to Mexico. I won't miss it.
Comment by Mickey G | February 26, 2008
I lived in California most of my life. It has set itself up for the fall. The early signs are already here.
The real problem is the whole United States is suffering the same fate. To much government. At some point moving from state to state won't do any good.
Comment by fbaginski | February 26, 2008