California's High-Tax, Big-Government Comedown

5/11/2014

Immigration Doesn't Lie: California's Boom Is Over

Anyone who has ever watched Animal Planet should be familiar with migrations. Geese do it, wildebeests and whales do it, turtles do it and, yes, people do it too. To migrate is a natural phenomenon.

What's interesting about most migrations is their purposes are generally positive: sex, food, sun and other such motivations. "The grass is always greener" is what they say.

For humans and, to a lesser extent, animals, a number of migrations also occur for negative reasons: famine, war, pestilence and, yes, taxes without corresponding benefits.

Population outmigration can be a key marker for a disturbed society with deeply rooted policy flaws. It's a far better sign of a state's health to have people lined up on its borders trying to get in than it is to have people lined up on its borders trying to get out.

Over the past 165 years, California has grown at an average annual compound rate of 3.8%. But in recent times it has morphed from being America's (if not the world's) greatest people attractor to being a massive population and jobs repellent (see actual population in blue on the chart above).

And there really is no end or solution in sight. If it weren't for net immigration (people who move from another country to California), California would be a mere shadow of its present size (the population from 1960 on without net immigration is shown in red).

Post-War Boom

To set the stage for the story of today's California, you should be aware that after World War II, Gov. Earl Warren cut California's highest marginal income tax rate from an astronomical 15% to 6%, where it remained for well over a decade. He also cut the state's sales tax rate.

In the chart on Page A15, I have plotted California's population growth relative to the U.S. from 1959 to the present. I have also plotted California's net domestic in-migration (people who move from state to state) as well.

My choice of 1959 is far from arbitrary. That was the year when Edmund G. (Pat) Brown became governor of California. It was also a year of enormous tax increases in California — no mere coincidence.

As governor in 1965, Brown even proposed raising California's highest personal income tax rate back up to 15%. But he withdrew that proposal when tax revenues exceeded projections.

After eight years of calamitous government, Ronald Reagan took the helm in 1967 and showed that he too could raise taxes with the best of them, culminating in his 1972 increases on corporate income and sales .

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Think of it: From 1958 through 1974, the highest personal income-tax rate in California went from 6% to 11% and the highest corporate tax rate from 5.5% to 9%. Even the sales tax rate went from 4% to 6%.

And these increases were merely the tip of the tax-increase iceberg. California's population growth went from a 2% premium over U.S. growth to zero in a decade and a half.

'Son Of Brown'

In 1974, California opted for the sequel to Gov. Brown-the-elder: "Son of Brown," starring Edmund G. (Jerry) Brown. But the storyline was radically different for the son than it was for the father.

From 1975 through 1982, taxes were lowered. California and Gov. Brown-the-younger were on a roll. Property tax rates were cut and constitutionally limited (June 1978), government spending limits were set (November 1979), the death tax was removed (June 1982) and income taxes were indexed for inflation (1978-79 legislation).

And California boomed as never before. After the passage of Proposition 13 and other tax cuts, the population during the 1980s grew by more than 6.1 million people. Put another way, California imported, net, almost a full San Francisco each and every year and a little more than a Massachusetts over the decade. Not too shabby.

But the years that followed weren't very attractive.

The California Constitution was amended by Proposition 98 (November 1988) to lock in ultra-high government spending on public education.

Proposition 111 (June 1990) raised gasoline, truck and other taxes. But even more importantly, it eliminated the effectiveness of a limit on state and local spending authored by Prop 13 co-author Paul Gann in 1979.

Then, 1991 brought huge, albeit temporary, increases in income and sales taxes.

Even with the expiration of these temporary tax increases in 1996, the state had been dealt a near-fatal wound, and recovery was shallow and slow. Public employee unions were firmly in control.

In 2003 there was an infamous car tax increase that came on the heels of a subsidized electricity scandal. Gov. Gray Davis was recalled, there was a 1% add-on millionaire's tax and Arnold Schwarzenegger professed his pro-growth vision of "Kahlifornia."

But the Terminator himself was shamefully terminated after failing to pass even one of four propositions he put on the ballot in 2005, and he switched sides faster than you can say Jack Robinson.

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And so far, the second coming of Gov. Jerry Brown has been the polar opposite of his first eight years.

The links between taxes and population growth, however, aren't the only public-policy "cause and effect" relationships in a state. Public spending also matters — a lot.

People seem to like good schools, safe neighborhoods, good roads and all the other amenities of life provided by state and local governments. And to receive these public services, it's pretty obvious you've also got to have some taxes.

In California, however, high tax rates don't correspond to better public services. No matter how much they're taxed, Californians are the recipients of the short end of the public-service stick. It's a double whammy: They pay more and get less.

About half (54%) of all state and local public employees in the nation are employed in education. In California there are about 228 full-time equivalent education employees per 10,000 of population. The national average of all states is 281. In fact, California has fewer education employees for its size than all but two states (Nevada and Washington state).

According to the Department of Education's National Assessment of Educational Progress (NAEP) test scores, California's schools are the fourth-worst in the nation. And fourth- worst is California's best performance in more than two decades.

If you think California's poor educational performance has something to do with inadequate funding levels and underpaid educational employees, you're wrong: Educational employees are paid more in California than educational employees in any state save New Jersey and Minnesota.

California doesn't fare much better with other essential services. Its highway employees have the highest pay in the nation, 58% more than the national average.

Government Pays

According to the Reason Foundation's most recent annual ranking of "Overall Highway Performance," California has the fourth-worst state highway system, which might have something to do with California employing the fourth-fewest highway personnel per 10,000 population of any state.

Police protection? Here too, California police protection employees are payroll winners and California citizens the losers.

The state pays its police protection employees more than any state — 38% more than the national average — and has 11% fewer police protection employees than the national average.

The average California fire protection employee is paid more than $115,000 a year (64% higher than the national average), while the state has the 15th-fewest fire protection employees per 10,000 of population (20% fewer than the national average).

Topping off these "achievements," California has the nation's highest poverty rate.

In the eyes of the Law and the Lord, all people are supposed to be equal. But not in the eyes of California's tax collectors. 

High-taxable-income Californians are audited and pursued far more than other residents — especially if they attempt to move out of state. They're the prey, and California's government is the predator.

Using IRS data for the tax years 1992 to 2009, we are able to track adjusted-gross-income (AGI) migration from state to state by year for the five mega states: Florida, Texas, Illinois, California and New York.

In the table below I've listed by state the total number of tax returns moving into that state (a), out of that state (b), and the number of net in returns (in minus out) (c), the average AGI per in return (d), the average AGI per out return (e), the in-return premium over out-return (f), and the state's net inflow of total AGI (g).

With high taxes and poor public services, is it any wonder why people and money are leaving California? If it weren't for the heavy-handed tactics of California's state IRS, a lot more people and money would have been gone.

But government threats and bureaucratic intimidation only harden people's resolve to leave. And leave they will. While the state's economy may wax and wane, California is in a death spiral.

Why am I so pessimistic? Can't the same democracy that voted these people into office take them right out again? I wish the answer were yes, but it's not.

Union Control

The California Teachers Association union is the state's largest political contributor, having spent $212 million in state races over the past decade on both candidates and propositions. This is more than twice the next-largest political contributor, also a state government employee union.

Public employee unions have had state politics locked down for so long that almost every public employee, past or present, judge or contractor, has benefited directly or indirectly from their actions. And to state the obvious, every opponent of theirs has been punished.

Finally, it's these very same people who also draw the political redistricting boundaries for federal, state and local political races.

Democratic Gov. Davis and the Democratic-controlled state Assembly and Senate redistricted California after the 2000 Census. Including the elections in 2000, there have been 560 regularly scheduled Assembly elections between 2000 and 2012.

After the election of 2000, the Democrats controlled the Assembly 50 to 30. In 2002 the Republicans picked up two out of 80 seats.

For the next six years there wasn't a single seat that changed hands. In the Obama sweep of 2008, the Democrats picked up four seats and the Republicans picked up one, leaving the Democrats in charge 51 to 29.

In the election of 2010, the Democrats picked up one more seat, giving them a 52 to 28 majority. But after the redistricting of 2011, the Democrats extended their majority to 55-25 in the election of 2012.

It's hard to imagine how the people of California can ever win when amoral politicians set the rules to perpetuate themselves, force state employees to pay dues that are then used for political purposes, appoint their own judges, pay off their supporters, punish their opponents and hire ringers to fight their fights. We need a miracle.

• Laffer is chairman of Laffer Associates, was an adviser to President Reagan and is co-author of "An Inquiry into the Nature and Causes of the Wealth of States."

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