Taxes

Is California's Decline Just More Right-Wing Propaganda?

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He's altogether ooky.

Any column about California that gets thumbs up from both Arnold Schwarzenegger and Jerry Brown is cause for deep suspicion, and in the case of Market MarketWatch columnist Brett Arends' sustained defense of California, the suspicion is justified.

Arends' thesis is that a cabal of rightwing pundits are manufacturing the story of the Golden State's economic troubles. He makes some points that are true: California pays out more than it receives in federal funding; the state's $2 trillion economy is the eighth largest in the world; and housing is way too expensive. (Arends conspicuously avoids looking at some of the reasons behind that last problem.)

Does this mean all the grim forecasts you hear about the Golden State (most emphatically from Gov.-elect Brown, though Arends says critics of Californianomics are motivated by animus toward the incoming third-termer) are bogus? Only if you're really willing to cherry pick your data.

Here's how Arends spreads the good news about California's investment climate (warning: heavy sarcasm ahead):

Back in the Silicon Valley glory days, in the late 1990s, California attracted an incredible 42 cents of every venture capital dollar invested in America. Ah, those were the days — when the private sector was still willing to back California with its own money. As any conservative will tell you, that's the real voting in the economy.

How far has California fallen from those giddy days?

According to the latest data from PricewaterhouseCoopers and the National Venture Capital Association, in 2010 California just got a miserable, er, 50 cents of every venture capital dollar invested in America.

So, how much, according to NCVA and PWC, does that actually come to? About one-third as much as in 1999, when VCs put up more than $51 billion in funding, and less than a fifth as much as in 2000, when they put up more than $100 billion. Nationwide, VCs spent an anemic $17 billion in 2009. It's true that California attracts a slightly larger piece of the venture capital pie than it did 11 years ago, but the pie is geometrically smaller than it was then. If you think venture capital is going to lift the Golden State out of the dumps, you're wrong.

To the fact that California's debt burden is among the highest in the nation, Arends responds with what looks like a larger perspective:

The Tax Foundation is non-partisan, but by the nature of what it does it leans politically to the right.

According to them, as of 2008 (the most recent year analyzed) state and local taxes in the average state came to about 9.7% of the annual state economy.

What was it in crazy, liberal, communistical, socialistical, un-American, soviet-style California?

Er, 10.5%.

I don't know that this makes me feel any better about losing more than a tenth of my money to pay for impassable roads and the second-worst education system in America. California does particularly poorly in tax policy compared to the state it most resembles in size, demographics and general economic mix. Texas has an overall tax burden of only 8.4 percent, and as this recent study [pdf] from the Texas Public Policy Foundation explains, the types of tax and regulatory burdens a state imposes are as important as the overall tax burden. That study was co-written by Art Laffer, who had something to do with Ronald Reagan way back when, so maybe by Arends' lights it should be dismissed as partisan bickering. But even through the scrim of Arends' ironical phrasing, you're still looking at a tax burden that is nearly a full percentage point higher than that for the rest of the country. Maybe that doesn't seem like much to Arends, but he doesn't live here.

What about the state's widely discussed problem with its public sector pension liabilities? Again, Arends advises us to look at the big picture:

The non-partisan Legislative Analysts' Office in Sacramento estimates there's a $136 billion gap in the state pension and benefits system. It may work out to more or less. But that's the actuarial figure at the moment.

Size of the state economy? Oh, $2 trillion a year. That's 14 times the size of this gigantic pension-fund gap.

California calls your money.

Of course, what matters is not how big the pension gap is relative to the state's total economy, but how big it is relative to the state government's budget. Sacramento spends a total of $86 billion a year [pdf], so the pension liability Arends describes as overstated is in fact much larger than the entire budget of the state. California already boasts the seventh-highest debt-per-capita rate in the country and the absolute lowest bond rating among the 50 states. That $2 trillion economy starts to go elsewhere (usually Texas) as you keep dipping into it to pay for reduced services.

Case in point: San Diego Tax Fighters Chairman Richard Rider (a donor to the Reason Foundation, which publishes this site) notes that the Golden State's corporate income tax receipts dropped 41.6 percent between 2009 and 2010.

I called the office of State Controller John Chiang to get an idea of what caused that shortfall. It turns out these figures are skewed by the timing of the measurement—2009 receipts were goosed by companies attempting to pay taxes early in response to a change in tax laws. The state's actual decline [pdf] in corporate tax receipts—$9.446 billion in fiscal year 2010, against $12.261 billion in 2009—is closer to 22 percent.

That's still the eighth-worst decline among the 50 states, and it can't all be explained by the recession. Twenty states posted year-to-year gains in corporate income tax receipts. It takes some pretty strenuous denial to say none of California's corporate tax revenue losses resulted from businesses leaving the state.

Fiscal conservatives aren't against California. Reality is. The state has lost a third of its manufacturing base in a decade, its budget is structurally unbalanced, and its political leaders believe you can get out of bankruptcy by fining jaywalkers.  You don't need to be a Republican or a Democrat to understand that these problems are real.