California Continues to Try (and Fail) to Tax Their Way to Prosperity

When Eagles singer Don Henley was asked what his most famous song, Hotel California, was about he said it was “basically a song about the dark underbelly of the American dream and about excess in America, which is something we knew a lot about.”

As he sang it, the Hotel California is an amazing place with “mirrors on the ceiling” and “pink champagne on ice.” But ultimately it was a hotel that allowed you to “check out any time you like, but you can never leave.”

Although the excess Henley sang about was personal: the biggest houses, the fastest cars, and the most expensive food, the lyrics also (somewhat ironically) mirror the present day state of California.

The Golden State boomed as the idyllic climate and picturesque views coupled with the glamour of Hollywood made it the destination of the rich and famous. Sadly, the luster is fading as years of government excess resulted in an enormous debt burden state leader’s just can’t seem to will themselves to solve.

California was long headed for trouble. Decades of lavish spending on public-sector pensions and other government goodies was slowly creating an untenable situation. For better or worse, the economic collapse sped up that process as real estate prices bottomed out, sucking property and income tax revenues down with them.

This should have been viewed as an opportunity to fix what was broken in California; to improve one of the worst business climates in the country, to alleviate a tax burden that is driving out many businesses, and course-correct its debt laden balance sheet.

But this is California we’re talking about there. Instead, they elected a Jerry Brown, a Democrat, to replace Governor Arnold Schwarzenegger (who admittedly didn’t handle things too well himself). Bloomberg reports on just how well that turned out for them:

California Governor Jerry Brown bet that a nascent financial recovery would lift the world’s ninth-largest economy enough to whittle down a $9.2 billion deficit. Instead, the gap has widened to $16 billion.

Today the 74-year-old Democrat will unveil his revised budget and explain what additional spending must be cut. Tax collections have run $3.5 billion below what he calculated four months ago. Spending has grown $2 billion above projections. The federal government and court ruling blocked some savings he expected, while his fellow Democrats in the Legislature balked at others.

California, with an economy bigger than Russia’s, lost more than a million jobs in the recession that struck in 2007, costing the most populous U.S. state 24 percent of its revenue. The new deficit estimate increases the urgency of the governor’s plans to increase income taxes on some earners to the highest in the nation, and boost sales levies that are now more than any other state.

The plan would temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent. It would also boost rates on income starting at $250,000. Those making $1 million or more, now taxed at 10.3 percent, would pay 13.3 percent, the most of any state.

In other words a state that has increased tax rates only to see tax revenues decline continues to think that raising taxes is the answer. Sadly, the outcome of this shell game is predictable. Entrepreneurs will look elsewhere, businesses will target their expansion in other states, and high-earning individuals (that aren’t of the Hollywood variety) will flee to lower tax jurisdictions. As a result, the state will go even deeper into debt, forcing it to cut even more deeply into the things that helped make it attractive to businesses in the first place, namely, a world-class university system.

This is the dark underbelly of success that permeated the lyrics of Hotel California. It’s also a perfect definition of the sordid politics of constant overpromising that has doomed the state to wallow in debt and deficits. It’s a hard learned lesson. Let’s hope the federal government, which faces many of the same choices in its own deficit, will learn from it.