California Flunks Fiscal Report Card

Commentary

A new study of the 50 states by the Cato Institute affirms what I’ve been writing in my columns here in The Epoch Times: California is over-taxed and over-regulated. Released Oct. 12, the “Fiscal Policy Report Card on America’s Governors 2022” gives Gov. Gavin Newsom and California an “F” grade for fiscal and regulatory policies.

Its main conclusion: Despite the record $100 billion budget surplus this year, “California’s good fortune may be ebbing. The state was long a magnet for entrepreneurs and capital, enjoying net in-migration from other states. But high taxes, high regulations, and high housing costs are making the state less attractive, and California now suffers from net out-migration.”

I talked to co-author Chris Edwards, first asking why that $100 billion surplus doesn’t make California an example to the country, what Newsom calls the California Way.

“The surplus is a good thing,” Edwards said. “But here’s what California is doing wrong. California has switched from an in-migration state to an out-migration state over many decades. It was the Golden State. But now high-earners in particular are leaving. Elon Musk is the most famous.”

The study itself provided the numbers: “IRS data show the state lost a net 114,652 households to other states in 2020. The state is losing two households earning more than $200,000 for every one that it gains. For this high-income group, that migration ratio is the third worst after New York and Illinois.”

Edwards told me the reason for the exodus: “Taxes are what drive people to move between states. There’s lots of evidence for that. Entrepreneurs often say that’s why they’re leaving. Musk complained about the high cost of taxes and regulations.”

What can California do to make things better? “Lots of states have high surpluses. They should be using their surpluses to cut taxes permanently, to stop driving away people.”

He said one-time refunds, such as the $9.5 billion in tax refund checks currently being sent to Californians, are OK. “But better to use that surplus to permanently change the tax code so they stop driving away entrepreneurs.”

One good thing, Edwards said, is California has built up its Rainy Day Fund. According to the tally in Newsom’s June 27 Enacted Budget Summary for fiscal year 2022-23, which began on July 1, “The Budget includes $37.2 billion in budgetary reserves. These reserves include: $23.3 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $9.5 billion in the Public School System Stabilization Account; $900 million in the Safety Net Reserve; and $3.5 billion in the state’s operating reserve.”

“We well may be in a recession now,” Edwards said. “So they have the money to handle the downturn.”

Is Newsom’s California Way a model for America, especially as he obviously is running for president? “No. California is becoming a less free state,” Edwards said. “California is one of the lowest ranked states. There are many reports about how California is excessively regulated. Housing costs are too high due to heavy regulations. It has the highest gas prices, taxes, and regulations.”

The CATO study ranks freedom in the 50 states, including not only taxes, but regulations. He pointed to the legalization of marijuana in California with Proposition 64 in 2016. “California can’t even legalization right,” he said. “Regulations and taxes are so high, most of the marijuana market still is in the black market. California legislators would do their residents a favor by reducing regulations in this and other areas.”

The Cato Report Card scores states from 0 to 100. Scores 34 and below get an F. The worst state was Washington, with a 28 score. Next worst was California, with 29. Surprisingly, two states Californians flee too did not score that well. Texas scored 47, a C grade. Florida got 52, also a C.

An A grade comes with scores above 65. The best states were Iowa with 78, New Hampshire at 74, and Nebraska at 73. The Report Card praised Iowa Gov. Kim Reynolds, a Republican in office since 2017:

Reynolds says that her politics are based on the ideas of limited government, personal responsibility, and individual initiative. As governor, she has translated those beliefs into lean budgeting and major tax reforms, earning her the highest score on this report.

Reynolds signed tax reforms into law in 2018. The reforms cut the top individual income tax rate from 8.98 percent to 8.53 percent, with a further cut to 6.5 percent and tax bracket consolidation if revenue targets are met. The reforms also cut the top corporate tax rate from 12 percent to 9.8 percent.

It quoted Reynolds from her 2022 State of the State Address: “All of these tax cuts have one thing in common – they reward work. … That’s never been more important, as the country is facing an unprecedented worker shortage.”

New Hampshire is famous as the only state with both no state income tax and no sales tax. The Report Card praised Republican Gov. Chris Sununu:

Sununu has resisted pressure to increase taxes and spending, and he has defended New Hampshire’s status as a low-tax state with no individual income tax. One battle has been over legislation for a paid leave program funded by a payroll tax, which Sununu has repeatedly vetoed. Instead, he signed a bill in 2021 allowing businesses to voluntarily opt into a paid leave fund and receive a tax credit to help cover costs.

Although New Hampshire is free of an individual income tax, it imposes two major business taxes, the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). In 2017, Sununu signed legislation to cut the rates of both.

These states show the right way to help citizens: reduce the immense cost of government by slashing taxes and regulations, while reducing spending on wasteful programs.

California could do the same if the people told the politicians to ease our government burdens instead of increasing them.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.