California State Capitol Building by David Monniaux is licensed under CC BY-SA 3.0 via Wikimedia Commons.
What is happening in California? Governor Gavin Newsom and Democratic supermajorities in the legislature are losing control of their state’s finances amid record-high tax rates and revenue collections, putting the future of California’s economy in peril.
Three years after borrowing an unprecedented amount of cash to fund unemployment insurance benefits during Covid-19 lockdowns, California still owes the federal government $17.6 billion in unpaid loans. That comprises 70% of the entire outstanding balance of pandemic unemployment debt, with all other states except New York having already paid off their debts in full, mainly through responsible use of surplus tax revenues.
Even though California’s outstanding unemployment debt is only 5% of the state’s $310 billion budget, legislators have no plans to allocate any of those dollars towards the debt. In fact, $1.5 billion that was previously put aside for debt payments is likely to be cancelled. And even with $118 billion in surplus revenue over the last 2 years, legislators opted for stimulus checks and new spending on expensive government programs, rather than prevent new taxes by paying off some of the debt.
Not wonderful news for businesses in the Golden State, as Governor Newsom plans on adopting higher taxes to pay off the debt instead – an automatic process which is likely to take a decade or longer. On top of regular unemployment taxes, California businesses will pay an additional 0.3% surcharge on their total federal tax liability. If the debt is not paid in 3 years, that new tax will double to 0.6%, costing businesses an average of $1,000 per employee.
It is no wonder that several high-profile businesses have already left the state in recent years, with a total of 153 companies moving their headquarters to business-friendly states like Texas, Arizona, and Florida – all of which boast significantly lower corporate and personal income tax rates than their progressive West Coast neighbor.
As reported by the Center Square: “Of the six corporations that announced their California exodus so far this year, four relocated to Texas. First Foundation, a California bank, moved its holding company to Dallas; Digital Realty Trust moved its data center to Austin, following Oracle, Hewlett Packard Enterprise and Tesla, which all announced their exodus [in 2020].”
Despite a growing number of high-profile businesses taking their employees and investment dollars elsewhere, legislators in Sacramento are only doubling down on the bad policy driving them away. Most recently, in April of this year, the Democratic Senate proposed a plan to increase taxes for successful companies.
Currently, all California businesses pay a flat state corporate tax rate of 8.84% – the 7th highest in the nation. Under the proposed plan, companies would instead pay a 6.63% on the first $1.5 million in earnings but would also suffer a crippling 10.99% rate on every other dollar they make. That would easily give California the 2nd highest tax on businesses in the country, rocketing past Minnesota, which currently holds the #2 spot with its 9.8% rate.
If enacted, this devastating proposal would constitute a net tax hike of $5 billion on 2,500 companies, inevitably spurring many of these businesses to join Tesla and leave for a better business climate. Meanwhile, any ambitious entrepreneur whose earnings one day cross the relatively low threshold of $1.5 million can look forward to paying a 66% higher tax rate as a direct result of his or her success. Expect up-and-coming entrepreneurs to take their business (and tax dollars) elsewhere.
Even as Democrats double down higher taxes to fund out-of-control spending, the crime wave is another major factor in why businesses continue to flee California. The latest in a string of statewide closures is a major Westfield shopping mall in San Francisco, whose owners had repeatedly pleaded with city officials to address rampant crime problems. “The current environment is not sustainable for the community, or businesses,” said the owners, less than a week after Park Hotels & Resorts handed two large properties back to the bank.
For California businesses struggling under high corporate tax rates that many legislators only want to make worse, large-scale retail theft is challenging their ability to survive. Target, for example, issued a statement in November blaming “organized retail crime” for an eye-watering $400 million profit loss in 2022.
The solution to combat retail theft by the tone-deaf Democratic lawmakers is a problematic bill got introduced by a Democratic State Senator Dave Cortese. Only one Democrat, State Senator Alvarado-Gil, sided with the Republican state senators in opposition, arguing that the legislation will incentivize more organized retail crime by prohibiting employees from stopping thieves. Rachel Michelin, the California Retailers Association (CRA) President and CEO explained: “It says no employee can approach someone who is shoplifting. So even if someone is trained on how to deter someone from doing that, now they’re not allowed to approach someone. So, what does that mean? We are opening up the door to allow people to walk into stores, steal and walk out.”
Will anything set off the alarm bells for elected officials in California to finally provide a sustainable, prosperous environment for Californians to do business and raise a family? Perhaps the ongoing exodus to freer, low-tax states may one day force a reckoning. According to a California Community Poll conducted in the month of June by Strategies 360, a polling and research firm in partnership with the Los Angeles Times, 40% of residents said they were thinking about leaving, with 61% saying the state’s high cost of living was a primary driver.
If California elected officials remain satisfied with how the state is operating, they can only look forward to losing more U.S. Congressional seats. The Golden State already lost one of its 53 U.S. House Seats after the 2020 census and, according to the 2030 Forecasted Apportionment by the American Redistricting Project, is on track to lose another 5 U.S. House Seats. Although California currently wields major economic and political power in D.C., population loss will increasingly shrink their ability to influence policy and advocate their interests on the national stage. In addition, as people continue to flee, the state will lose billions more in tax revenue to fund the state’s needs like infrastructure, housing and so on. And as people become more frustrated with the state’s problems, they may become more likely to engage in social unrest, such as protests and riots.
California needs drastic structural reforms to restore its golden roots. Californians need to have the courage to hold the elected officials accountable and consider choosing new leaders who are willing to make a change.