California Governor Gavin Newsom is demanding that Washington—i.e., American taxpayers—bail his state out of its deep financial pit.
He’s playing the old first responders blackmail game—Newsom says he’ll have to fire cops and firefighters if we don’t fork over.
At the same time Newsom is threatening to fire cops and firefighters, California is establishing a financial relief program for illegal immigrants. The New York Times calls it “a landmark new state relief program that will provide taxpayer-funded assistance to undocumented immigrants, who have been shut out of federal relief programs and unemployment assistance.”
We can sympathize with plight of people in the country illegally as they face the COVID-19 crisis and earnestly pray that some private charities are helping them with food and other basic necessities and still not want to spend taxpayer money on such a “landmark” program, especially in a state with an already strapped budget.
Let’s face it: providing taxpayer assistance to illegal immigrants is a statement. Some Americans would not be comfortable supporting that statement. They would prefer their tax money to be used differently.
An excellent piece (“California’s Budget Bust-up”) by Steven Malanga in City Journal illustrates why taxpayers from, say, Idaho, might begrudge California their money.
Malanga explains how California’s financial troubles are self-inflicted.
According to Malanga, its fiscal shortfall for the fiscal year starting in July could be $54 billion. Newsom has tried to portray this as “a direct result of Covid-19,” but as Malanga says, that simply is not true.
California’s woes boil down to spending too much and having a volatile, already-overtaxed tax base. Its taxes are the highest in the U.S. Malanga writes:
It’s no exaggeration to say that California—with its 13.3 percent personal income-tax rate, the highest of any state—is the model of progressive fiscal policy. The state also takes a big tax bite out of capital-gains income, another significant source of revenue. In 2017, Californians reported $142 billion in capital gains, by far the largest amount of any state. Two-thirds of that total came from people making more than $1 million. The top 1 percent of California earners now account for about 23 percent of the state’s adjusted gross income but pay 46 percent of the income tax—nearly $50 billion last year, all of which came from an estimated 15,000 households. Before the coronavirus recession hit, California projected that more than 70 percent of its general fund revenues—or $102 billion—would come from personal income taxes. That’s compared with just 25 percent in the 1960s, when the top rate was about half what it is today.
California’s problem: the income of the rich is highly variable, based heavily on dividends, capital gains, and bonuses, which mostly vanish in recessions. In the 2008–2009 downturn, for instance, California’s income-tax collections declined by $7 billion—from $50 billion to $43 billion—in one year. They’ve come roaring back, especially in the last few years, as the stock market reached new heights.
California added new taxes, bumping up the rate for those earning more than $250,000 a year and increasing the state sales tax. Originally passed as temporary measures, these tax increases were extended in 2016 for another 15 years. That helped fill the till even higher during the recovery but means that any future tax increases will come on top of already-high rates.
A volatile tax base means that the state is likely to obligate itself to overspend in fat years. For example, California increased spending on homelessness by $3 billion in the last budget. San Francisco and other towns were already spending on homelessness. Despite the spending, homelessness is actually increasing in the state. Decriminalization of property theft below a certain level of value and the distribution of free meals and syringes are factors.
There are indications that Republicans in Washington might not be in the mood to bail out California. California could also try to borrow money, which would require approval of taxpayers. There might be a better solution:
[Washington’s refusal] might put pressure on Governor Gavin Newsom to reopen the state’s economy faster than originally planned, in hopes of a surge of tax revenues to cut the projected deficit.
Sounds like a plan.