CA doing 'everything wrong'

APRIL 8, 2010

By JOHN SEILER

A book released April 7, 2010 ranks California among the “States That Do Everything Wrong” on their state taxes and budgets. The other states in that dismal category are Michigan, New York and New Jersey.

The book is “Rich States, Poor States: The ALEC-Laffer Economic Competitiveness Index,” and is free online. It’s by the American Legislative Exchange Council, a non-partisan organization of state legislators. It has 2,000 members, Democrats and Republicans. The report’s authors are Arthur Laffer of Laffer Associates, the father of supply-side economics, who helped design California’s Proposition 13 tax cuts and President Ronald Reagan’s tax cuts; Stephen Moore, senior economics writer at The Wall Street Journal; and Jonathan Williams, director of ALEC’s tax and fiscal policy task force.

While California is America’s biggest state in population by far, its problems are not unique, only worse that most. The reason California and so many other states are in trouble with their budgets, the book found, is “An unprecedented buildup in the size of state budgets. The chickens have come home to roost from the spending in state capitols from 2004-08.”

The states that have done the worst fiscally – California, Michigan, New Jersey and New York – once were “thriving,” but now area “economically depressed,” compared to the other states. In these states, “high taxes are driving away the geese that lay the golden eggs.”

Doing Everything Wrong (Almost)

I took part in a conference call with reporters from around the country and the three authors. Laffer explained that the Competitiveness Index is made up of 15 variables, including top personal income tax rate, top corporate tax rate, personal income tax progressivity, other taxes, debt service, minimum wage, workers compensation burdens and tax or expenditure limits.

California ranks 46 among the 50 states on the book’s “Economic Outlook Rank.”  The only states ranking lower are, in descending order, Illinois, New Jersey, Vermont and New York (50^th).

California’s 46 ranking is a decline from a rank of 42^nd in 2008 and 43^rd in 2009 on previous editions of the Index. So things are getting worse.

Among the 15 different variables studied, California performed most dismally on:

1. “Right to work state” (meaning one is not forced to join a union), ranked 50^th.
2. “Top marginal personal income tax rate,” 46^th.
3. “Recently legislated tax changes,” 46^th (because of the February 2009 tax increases Gov. Arnold Schwarzenegger signed into law).
4. “State liability system survey (tort litigation treatment, judicial impartiality, etc.),” 44^th.
5. “State minimum wage” of $8.00, 44th; the federal minimum floor is $7.25. Moore pointed out that the minimum wage especially kills jobs that would have gone to young people just entering the job market, but who instead go unemployed.

It wasn’t all bad. On the positive side, California performed well on a couple of variables:

1. “Estate/inheritance tax levied?” No such tax; ranked 1^st.
2. “Number of Tax or Expenditure Limits,” two such limits, mainly Proposition 13, for a rank of 4^th.

But the overall effect is highly negative. “People don’t work to pay taxes,” Laffer explained. “They work for what they get after paying taxes.’

The Moving Van Effect

The book discusses what it calls the “Moving Van Effect,” in which a state’s economy gets so dismal that people leave. This is ranked as “Absolute Domestic Migration,” for the decade 1999-2008. New York had the worst number, at 1.7 million leaving. California was second worst, at 1.4 million leaving.

This figure includes only domestic migration of people already citizens; it doesn’t include immigration from other countries, which has caused California’s population to grow. However, even that number is not encouraging. As I noted in an article a month ago, this might be the first year since 1850 that California does not gain a congressional seat because other states are growing equally fast, or faster.

I asked Laffer if the continuing U.S. economic recession – which he expects will not end soon – would intensify the already fierce competition among the states for businesses and jobs. “Yes,” he replied. “There’s always competition among the states. They will become even more aggressive in their competition.”

Co-author Williams pointed out that states now “act like brands” in business; and that some states, including California, have “broken brands” because of their anti-business climate.

“It’s basic economics,” Laffer explained. “Imagine you have two locations, A and B. If taxes rise in B and go lower in A, then jobs will move from B to A. For the 50 states and the District of Columbia, economics plays a role in jobs and production. ‘Location economics’ is critical’.”

Laffer said that four years ago he moved, along with about 20 employees, from California to Nashville only because Tennessee has no state income tax, compared to California’s current top tax rate of 10.55 percent. “Businesses don’t locate to make a social statement, but to make an after-tax profit,” he said.

Laffer concluded: “Taxes don’t redistribute income. They redistribute people and jobs and businesses.”

The Depressing Stimulus

The authors of the book believe that President Obama’s stimulus package actually will hurt the states by postponing dealing with critical budget shortfalls.  Gov. Arnold Schwarzenegger has said the stimulus created 150,000 jobs in California.

Williams called it the “Do Something Disease in D.C.” which has “created a much worse situation.” Moore said that the stimulus money only kicks state budget solutions “into the future.”

Moore said that the stimulus money that went to the states originally was taken from the people of the states, either as federal taxes or loans. So there could be no overall stimulus, only a shuffling of money from one group to another around the country.

Pensions explosion

“Rich States, Poor States” quotes former California Assembly Speaker Willie Brown, a Democrat, writing in the San Francsico Chronicle

The deal used to be that civil servants were paid less than private-sector workers in exchange for an understanding that they had job security for life.

But we politicians, pushed by our friends in labor, gradually expanded pay and benefits to private-sector levels while keeping the job protections and layering on incredibly generous retirement packages that pay ex-workers almost as much as current workers.

Talking about this is politically unpopular and potentially even career suicide for most officeholders. But at some point, someone is going to have to get honest about the fact that 80 percent of the state, county and city budget deficits are due to employee costs.

Either we do something about it at the ballot box, or a judge will do something about it in Bankruptcy Court. And if you think I’m kidding, just look at Vallejo.

On Vallejo, see Steven Greenhut’s March 26 article in The Wall Street Journal.

The ALEC study also lists the worst-performing state pension funds for 2008, the last year studied:

1. Pennsylvania State Employees Retirement system, down 28.7 percent.
2. Ohio Public Employees Retirement System, down 26.8 percent.
3. Pennsylvania Public School Employees Retirement System, down 26.5 percent.
4. California Public Employees Retirement System, down 23 percent.

All these losses must be made up by taxpayers because public employee retirement funds are guaranteed in state constitutions. The book concludes:

However, the only long-term solution will be to replace current defined-benefit plans with 401(k) style defined-contribution plans for new employees. Michigan and Alaska have transitioned newly-hired state employees into defined contribution plans and other states are moving in that direction….

If state lawmakers fail to enact fundamental reforms in the area of public employee pensions, the long-term financial health of the states could be compromised—and taxpayers will certainly be left on the hook.

For California, especially, “Rich States, Poor States” is a wakeup call.

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].