The Magazine

Decline and Fall

California votes for more: taxes, spending, debt, government

Nov 19, 2012, Vol. 18, No. 10 • By CHARLOTTE ALLEN
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On November 6 voters in California did something nearly unheard of during the past 30 years: They approved, by a margin of 54 percent to 46 percent, a ballot measure raising state income taxes on the most prosperous Californians and sales taxes on everyone, even though the state’s sales tax is already the highest in the nation.

Jerry Brown and Prop 30

Newscom

The successful tax-hike initiative isn’t just a hoped-for generator of revenue: a projected $34 billion over the next seven years, which California desperately needs because it is running a $16 billion budget deficit and its cumulative total debt is at least $618 billion, the highest in the nation. That latter amount includes up to $500 billion in unfunded pension liabilities for 220,000 state employees plus billions in unpaid bills, delayed payments to schools, and amounts raided from dedicated funds to cover general expenses.

The new tax is also intensely symbolic. It represents the culmination of a two-decade-long process in which the nation’s most populous state, once a prosperous industrial and high-tech powerhouse and magnet for immigrants from elsewhere in the country, has transformed itself into something else: a high-tax, high-spending, highly regulated, and chronically broke welfare state that is fast losing to out-migration both its middle class and the businesses and industries that create jobs. California factories once housed such industries as steel, automobile manufacturing, tire production, and aerospace. Those are now mostly or entirely gone. Silicon Valley employs only tiny numbers of tech geniuses; the actual manufacturing is done elsewhere. California’s unemployment rate tops 10 percent, in contrast to less than 8 percent for the nation as a whole. A full third of Americans on public assistance reside in California, even though it houses only one-eighth of the nation’s population. It is safe to say that only the very rich and the very poor​—​along with the 1.8 million who collect state and local government paychecks (some of the highest in the nation, according to the Census Bureau) and belong to powerful public-employee unions​—​can afford to make their homes in the Golden State these days. In short, California is the new Massachusetts. Or, given that it now has the worst state credit rating in America, thanks to chronic overspending, massive state debt, and the clout of the pension reform-resisting unions, California is the American Greece.

Until the passage of Proposition 30 last week, California voters had for more than two decades consistently rejected every general taxation measure put before them​—​and going directly to the voters on tax measures is fairly common in California, because the state constitution requires a hard-to-attain supermajority of two-thirds for a tax bill to pass the state legislature. The last time a tax measure on the general ballot had passed was in 1988, when California voters approved a cigarette levy​—​essentially a “vice” tax​—​aimed at funding antismoking and environmental programs. This November, however, voters agreed to raise the state sales tax to 7.5 percent from 7.25 percent, which means that consumers in, say, Los Angeles County, which has its own local sales tax, will be paying close to 10 percent in taxes on every item they purchase, save for groceries. Proposition 30 also includes a soak-the-rich so-called millionaires’ tax with an Occupy Wall Street flavor that hits people with household incomes of more than $250,000 a year, the same group that is President Obama’s target for raising federal income taxes. State rates for that 3 percent of Californians, many of whom own small businesses but are taxed as individuals, will rise to anywhere from 10.3 percent to 13.3 percent for those earning more than $1 million a year. Living in California has suddenly become even more expensive than it already was, especially for lower-income people on tight budgets, for whom every dollar paid out in sales taxes is a dollar that can’t be spent on something else. The tax increases are billed as “temporary”​—​if seven years for the income-tax hike and four years for the sales-tax hike can be called temporary.

Proposition 30 was the brainchild of California’s Democratic governor Jerry Brown as an end run around the legislature and its two-thirds rule. It had been touted as a measure that would save the state’s public schools and universities from drastic cuts in state funding. The initiative’s trademark was a shiny red teacher’s apple. “It sold itself,” Brown declared at a victory party. Indeed, California’s teachers’ unions, widely held to be the richest and most powerful unions in the state, were the largest donors to the more than $40 million that Brown’s Proposition 30 campaign raised. In fact, however, none of the revenue that Proposition 30 is expected to produce is actually earmarked for education, which was a “for the children” fig leaf designed to sell the initiative to tax-shy voters. Proposition 30 money will go straight into the state’s general fund. A 1988 initiative, Proposition 98, also heavily backed by the teachers’ unions, requires the state to devote 40 percent of its annual budget to K-12 schools and community colleges, so the billing of Proposition 30 as an education tax was honest in the sense that more money in the general fund means more money for education​—​along with more money for whatever California’s legislators choose to spend the remaining 60 percent on. Even so, the “cuts” that would have been
triggered had the initiative failed weren’t really cuts in existing spending. A $6 billion spending increase built into California’s fiscal 2013 budget would not have taken place had Proposition 30 failed. The $6 billion expected to be raised by Proposition 30 next year is therefore already spent and will do nothing to decrease the deficit.

Along with passing Proposition 30, Californians voted 56 percent to 44 percent to reject another ballot measure, Proposition 32, that would have barred unions from using automatic payroll deductions to raise money for political campaigns. Such bans are tremendously effective in crippling the political power of public-sector unions. “In 2001 Utah passed a law requiring the contributions to be voluntary, and the rate of contributing members to union PACs plunged from 68 percent to 6.8 percent,” says Larry Sand, a retired Los Angeles middle-school teacher who heads the California Teachers Empowerment Network, an anti-union organization for educators. “Idaho passed a law [in 1997] requiring the unions to get written consent from their members, and the rate dropped 75 percent,” Sand added in a telephone interview. Unions and their Democratic party allies fought to defeat Proposition 32 even harder than they fought to pass Proposition 30, pouring more than $75 million collected from their 

2.4 million members into the anti-32 campaign and enlisting hordes of volunteers to get out the vote. The $60 million raised by the proponents paled by comparison, as organized labor pounded home a class-warfare message that Proposition 32 would pave the way for the domination of politics by corporations and wealthy individuals.

Voters in other states​—​notably Indiana and Wisconsin​—​have won important recent victories against public-sector unions, which have been increasingly resented by a recession-hit middle class that sees itself as forced to subsidize via taxes a bloated government workforce that typically enjoys higher pay, lifetime job security, and guaranteed pensions that are nonexistent in the private sector. Indiana became the twenty-third state to limit unions’ power to collect dues from non-union workers, and Wisconsin voters rejected a labor-led effort to recall Republican governor Scott Walker as punishment for signing a bill limiting public employees’ collective-bargaining rights. In California, by contrast, unions rule, and they have played a major role in promoting the state’s toxic combination of crippling taxes and endemic overspending. The political DNA of California now features a double-helix intertwining of a dwindling middle class and a dwindling Republican party, effectively turning California into a one-party state in which Democratic politicians fueled by union dollars and unconstrained by the need for compromise vote their wish lists (and those of the unions that subsidize their campaigns) into law.

“It’s the weird opposite of a virtuous circle,” says Joel Kotkin, a political analyst and professor of urban development at Chapman University. “California used to basically have a good two-party system that forced both parties to be more centrist. So Ronald Reagan [who was governor from 1967 to 1975] was a much more conciliatory figure than you would have thought, and the Democratic base was still basically middle-class. Now, the Democratic party in California basically consists of rent-seeking capitalists [Kotkin’s sobriquet for Silicon Valley tech tycoons who thrive on tax breaks], greens, the bureaucracy, the poor, people with ethnic grievances​—​and Hollywood. Hispanics vote the same way as rich liberals in Marin County. All of them favor policies that prevent the formation of middle-class households.” The greens push environmental regimes that strangle agriculture, construction, and entrepreneurship, while the high taxes demanded to support bulging bureaucracies and a vast and costly welfare apparatus (some 237 California localities sought voter approval of special taxes, assessments, and bond issues on November 6) drive businesses and the decently paying white- and blue-collar jobs that accompany them out of state. “It’s hard for someone who’s not wealthy to live anywhere near the coast nowadays,” Kotkin says.

In September the Manhattan Institute published a report, “The Great California Exodus: A Closer Look,” that used Census, IRS, and other data to detail exactly how dramatic and seemingly unstoppable the migration of Californians to other states has been. Starting in 1990, when the post-Cold War “peace dividend” shut down California’s aerospace industry, generating a recession, the flood of transplants from other states that had been California’s hallmark since the end of World War II abruptly reversed itself. Residents moved to other parts of the Sunbelt, chiefly Texas, Arizona, and Florida, where taxes were lower and where the jobs were. During the decade from 2000 through 2010, California lost nearly 1.1 million residents, with Texas alone receiving about one-fourth of them.

The state’s population continued to grow during the decade, but mostly because of legal and illegal immigration, chiefly from Mexico. The authors of the report, journalist Tom Gray and demographer Robert Scardamalia, were able to pinpoint exactly why so many middle-class Californians decamped for Texas: California’s high taxes and generally poor business climate has deterred many potential employers from setting up shop in the Golden State and prompted many of those already there to leave. The discouraging factors include high rents and real estate prices, more expensive electricity, “unfriendly laws and bureaucrats,” mazes of regulation that discourage expansion, clogged freeways (because California stopped building them after the 1980s), union shops that drive up labor costs, and unstable, tax-dependent public-sector finances that have made public services unreliable. The Tax Foundation’s 2012 State Business Climate Index “ranks California less favorably than 47 other states,” Gray and Scardamalia wrote. The U.S. defense industry eventually revived thanks to the Iraq and other wars​—​but not in California. The tech industry is booming​—​but in Texas, Utah, and other states, not California. (Apple, for example, is about to open a $280 million campus in Austin that is expected to generate 3,600 jobs.) The state has experienced some periods of prosperity over the past two decades, but it has been asset-inflation prosperity: the dot-com bubble of the late 1990s, the housing bubble of the mid-2000s. Those burst years ago.

The center-right middle class is the demographic mainstay of the Republican party, and as the middle class has withered in California, so has the GOP, which is now pretty much confined to the state’s relatively unpopulated agricultural and desert interior, while the coastal metropolises where the vast majority of Californians live​—​with the exception of historically conservative Orange County​—​went solid blue for President Obama. The California legislature has been controlled by Democrats since 1970 (except for one year), but is now almost laughably lopsided. On November 6 the Democrats managed to secure their long-desired two-thirds supermajority in both houses (54 seats out of 80 in the Assembly, 27 out of 40 in the Senate) that will enable them come January to pass budgets and tax increases whenever and of whatever size they like. “The Republicans have been neutralized,” says Robert J. Cristiano, a senior fellow at the Pacific Research Institute in San Francisco. “There’s not a single Republican holding statewide office,” he adds. “Policy in this state is 100 percent dictated and determined by the Democratic party.” Republicans can’t even gerrymander themselves safe districts anymore, thanks to a 2010 ballot measure, Proposition 20, that effectively outlaws oddly shaped legislative territories. So tight is the Democratic grip on California politics that Sen. Dianne Feinstein, up for a fifth term on November 6 (she won handily), refused to bother debating her Republican opponent, former IBM executive Elizabeth Emken.

With Democratic ascendancy has come union ascendancy. California’s unions, and especially its public-sector unions, which can use member dues as piggy banks to bankroll the candidates of their choice, can essentially dictate that those same legislators always vote to further union interests. They can also use their volunteer-commandeering abilities to harvest the signatures ballot measures such as Proposition 30 require. California has a long-running populist tradition of heavy use of the initiative process, which can be a godsend to the measures’ promoters, who can use advertising to appeal to emotions rather than having to horse-trade with legislators on a bill. This year’s
ballot, for example, included a raft of sentiment-inspired initiatives, including proposals to abolish the death penalty and to require genetically modified foods to be labeled as such. Voters rejected both measures.

The most powerful of the unions​—​and perhaps the most powerful special-interest group in the state​—​is
the California Teachers Association (CTA), with 325,000 members paying about $1,000 apiece annually in dues. The CTA, which had thrown its clout behind Jerry Brown in his 2010 race against GOP contender Meg Whitman, then turned and helped shape Proposition 30 with its trigger cuts that suggested to voters that their schools and universities would be financially gutted if the measure didn’t pass. Propositions 30 and 32 were only two of the initiatives and legislative bills in which the CTA became heavily invested in order to ensure that its members remain among the highest-paid teachers in America (the average annual salary for California teachers is $68,000), with lifetime job security and no responsibility to ensure that their students learn anything. In 1996, for example, the CTA spent $1 million on ads to push through a “class size reduction program” providing state subsidies to school districts that capped classrooms at 20 students. From 1996 through 2009 California spent $20 billion on the subsidies without making a dent in students’ chronically abysmal performance. (In 2011 the National Assessment of Educational Progress ranked California 46th out of 52 states and jurisdictions in students’ reading and math.) Yet the program did result in the hiring of more than 18,000 new teachers statewide whose dues fattened union bank accounts. In 1998 and 2002 the CTA spent $7 million and $26 million respectively to help defeat ballot measures that would have set up voucher programs to enable low-income parents to send their children to private schools instead of failing public ones (the CTA has also waged a long-running war against charter schools and making student performance a criterion for teacher review).

The most stunning CTA victory was its political emasculation in 2005 of Arnold Schwarzenegger, who may well be the last Republican governor of California in our lifetimes. Schwarzenegger that year decided to take on both the unions and the Democratic-controlled legislature with four separate initiatives in a special election. One resembled Proposition 32 and would have required unions to obtain their members’ consent before using dues for political purposes. A second would have lengthened the time that teachers would have to be employed in order to receive tenure (it’s currently a shockingly short two years). A third would have slowed the growth of state spending, and a fourth would have redrawn state legislative and congressional districts in ways that would have reduced Democratic power. Nearly every union in California joined forces to wage a $225 million campaign that resulted in the defeat of all four measures. The CTA alone spent $58 million. “The CTA got so invested that it mortgaged its headquarters in San Francisco,” says Troy Senik, a senior fellow at the Center for Individual Freedom who lives in Palos Verdes, California. The 2005 debacle spelled the end of Schwarzenegger’s career as a challenger to the state’s political status quo. He won a second term in 2006, and began making nice to the left with carbon-emissions cuts and opposition to offshore oil-drilling.

The attitude of both Brown and the California legislature toward the state’s runaway budget and forbidding economic climate seems to be “whatever.” In July Brown signed a bill authorizing $5.8 billion to begin construction​—​with union labor—on California’s controversial high-speed rail line, even though no one knows where the money will come from to pay off the bonds, and few Californians are likely to ride the train, which will run between Bakersfield and Fresno, two smallish cities in the rural Central Valley. Brown had campaigned on a promise of reforming the state’s grossly underfunded public-employee retirement system. But when it came time to pass legislation this year, the reforms turned out to be anemic. A pension law signed by Brown on September 12 did raise the retirement age to qualify for full benefits, for some employees as low as age 50, to age 62—but only for brand-new employees hired after 2012. The new law does put an end to the widespread practice of giving raises to employees just before retirement so as to increase the dollar amount of their pensions. The law also could require new employees to contribute 50 percent of their pension cost—but allows that 

provision to be modified by collective bargaining.

Brown did make a show of fiscal sobriety during the weeks before Proposition 30 passed, when public support for his pet tax measure seemed to be waning. He dared to anger unions by vetoing bills that would have made it a crime for farmers not to provide shade and water to their agricultural employees and established a bill of rights for housekeepers that mandates mealtimes and rest periods. He likely annoyed teachers by refusing to sign a bill that would have dictated what their archenemies, charter schools, could serve in their cafeterias. In a fourth union-defying move, Brown wielded his veto pen against a bill that would have allowed families of police officers and firefighters to collect job-related death benefits worth up to a quarter of a million dollars, even if the death occurred as long as nine years after the cop or firefighter left the public payroll.

But now that Propositions 30 and 32 are on the books, the spending party is likely to resume. Some Californians are hoping for a charismatic and strong-willed political figure​—​a Giuliani for the Golden State​—​who can bridge the partisan divide and help them avert the fiscal ruin headed in their direction faster than the Bakersfield-to-Fresno high-speed train. That’s unlikely to happen. What is more likely to happen is a collision with reality. Earlier this year three strapped California cities overwhelmed by their unfunded pension liabilities​—​Stockton, Mammoth Lakes, and San Bernardino​—​filed for bankruptcy. Two other cities,
San Jose and San Diego, saw what was happening and drastically overhauled their pension plans with voter support that came close to 70 percent. Richard Riordan, the former Republican mayor of Los Angeles, hopes to place on the 2013 ballot a similar measure that would make the city’s pension plan more like the 401(k) plans that most private businesses offer, with employees contributing substantially to their own retirements. “The city is technically insolvent right now,” says Alexander Rubalcava, a financial consultant working with Riordan on the overhaul. And so is the state of California.

Charlotte Allen, a frequent contributor to The Weekly Standard, last wrote on comedian Bill Maher.


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