Eureka! California Tax Revenue Plunges 22%

State Controller John Chiang continues to uphold the California Great Seal Motto of “Eureka” — I have found it.  But what Chiang is finding as controller is that California’s economy as measured by tax revenues is still tanking.

State tax collections for February shriveled by $1.2 billion, or 22 percent, as compared to a year earlier.  The deterioration is more than double the shocking $535 million reported decline for the previous month, January.

The cumulative fiscal year decline is $6.1 billion, or 11 percent down versus this period in 2011.  While Gov. Jerry  Brown promises strong economic growth is just around the corner, Chiang proves that the best way for Sacramento politicians to hurt the economy and thereby generate lower taxes is to have the highest tax rates in the nation.

California politicians seem delusional in their continued optimism that high taxes have not savaged the state’s economy.  Each month’s disappointment is written off as due to some one-time event.  The controller’s office did acknowledge that higher than normal tax refunds for February might have reduced the collection of some personal income taxes.

Given that 2012 has an extra day in February for leap year, there might have been one day more of tax refunds sent out.  But one day out of 29 is just 3 percent. Yet the controller’s report shows personal income taxes fell by $325 million, or 16 percent versus last year.

Furthermore, leap year would have added another day for retail sales and use taxes, but those taxes also fell during February by an even larger $813 million, or 25 percent over 2011.

The more likely reason tax collections continue falling is that businesses and successful people are leaving California for the better tax rates available in more pro-business states.  Derisively referred to as “Taxifornia” by the independent Pacific Research Institute, California wins the booby prize for near the highest personal income tax rates in the nation and higher sales tax rates than all but four other states.  Though Californians benefit from Proposition 13 restrictions on how much their property tax can increase in one year, the state still has the worst combined state tax burden in the United States.

Spectrum Locations Consultants recorded 254 California companies moved some or all of their work and jobs out of state in 2011, 26 percent more than in 2010 and five times as many as in 2009.  According SLC President Joe Vranich, the “top 10 reasons companies are leaving California”:

1. Poor rankings in surveys;
2. More adversarial toward business;
3. Uncontrollable public spending;
4. Unfriendly business climate;
5. Provable savings elsewhere;
6. Most expensive business locations;
7. Unfriendly legal environment for business;
8. Worst regulatory burden;
9. Severe tax treatment;
10. Unprecedented energy costs.

Vranich considers California the worst state in the nation to locate a business and Los Angeles is considered the worst city to start a business.  Leaving Los Angeles for another surrounding county can save businesses 20 percent of costs.  Leaving the state for Texas can save up to 40 percent of costs.  This probably explains why California lost 120,000 jobs last year and Texas gained 130,000 jobs.

Brown’s answer to the state’s failing economy and crumbling tax revenue is to place a $6 billion tax increase initiative on the ballot to support K-12 public schools.  He promises to only “temporarily” raise personal income rates by 25 percent on any of the rich folk who haven’t already left.

Recent statewide polls show that support for the measure has fallen from 72 percent to 52 percent of likely voters since January.  Democrats favor the tax increase by 71 percent, while Republicans oppose it by 65 percent.

But independent voter support is now down to only 49 percent favoring versus 41 percent opposed as these swing voters begin to learn the initiative also raises their sales taxes, and the initiative will also be available to fund public safety realignment and freeing up dollars for “other spending commitments.” According to Chiang, California has plenty of “other spending commitments”:

“The State ended last fiscal year with a cash deficit of $8.2 billion. The combined current-year cash deficit stands at $21.6 billion.  Those deficits are being covered with $15.2 billion of internal borrowing (temporary loans from special funds) and $6.4 billion of external borrowing.”

When it comes to bankrupt California politics, the Great Seal of the State of California (picture above) provides some good laughs.  It was designed by U.S. Army Major Robert S. Garnett, who later became the first general to die in the Civil War.  The grizzly bear appears on the Seal to represent strength, but the last grizzly was shot 90 years ago.  The miner using his sluice box dredge represents golden opportunity, but such mining became a crime as of August 2009.  Sadly, the five ships that once represented the state’s economic power now represent the relocation companies taking that power away.

(Chriss Street is a financial writer and speaker, and is author of the book, ”The Third Way.”  Visit his blog for more information.)