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If
you watched the recall of Governor Gray Davis and
the elevation of Arnold Schwarzenegger in California, you know that the Golden
State
has lost its fiscal luster.
This is a state that has taxed and spent
itself into near oblivion.
California
is now drowning in a massive budgetary mess, has one
of the highest unemployment rates of any state in
the country, and has a bond rating barely above junk
bond status.
How
did this happen? As Arnold
has said many times: “Our politicians have spent
us into the poorhouse.”
And
if Virginia
doesn’t soon change its ways, it’s headed into
the winds of the same fiscal storm that has ruined California. The
similarities between the two states are
frighteningly striking.
California’s economic crisis stems from chronic overspending
by the governor and state legislature, which saw the
state government grow by more than 40 percent in
just five years. But
Virginia’s budget grew at an even more reckless pace than California’s. In
Richmond the state budget expanded by 56 percent over the
same time period.
The
chart below shows that in recent years both taxes
and spending have increased at a faster pace in
Virginia
than in the once-Golden State.
|
1997-2002
Per Capita Budget Growth
|
| |
Spending |
Taxes
|
| California
|
42% |
28% |
| Virginia
|
56% |
37% |
Virginia
and California
both benefited enormously from the high tech
revolution of the 1990s.
Northern Virginia
has the most high tech companies of any region in
the country outside
Silicon Valley. During the
technology sector’s boom years, the two states
were awash in tax revenues.
In fact both California
and
Virginia
nearly doubled their tax intake in the 1990s.
However, the tech bust of 2000 and 2001 left
a big financing hole in each state’s budget.
To
fill that hole Gray Davis refused to cut the state
budget. Instead,
he issued record levels of new debt and raised
taxes. To make
the tax system “fairer,” Davis imposed tax hikes
on the rich and on business.
But California, like Virginia, already had a tax system where the “rich”
shouldered a huge share of the tax burden.
The richest one percent of Californians pay
about one third of all the state’s income taxes.
Virginia
isn’t quite that top heavy in taxes, but the rich
do shoulder a disproportionate share of the burden
here as well.
Virginians
should pay close attention.
Higher taxes in California
combined with a culture in Sacramento
hostile to business led to the first major
out-migration of wealthy individuals and businesses
in the state’s history.
California’s entrepreneurial community especially is
uprooting itself and moving to Nevada,
Washington, Idaho, Utah, and other neighboring states that have much
lighter tax burdens.
Gov.
Mark R. Warner is now pursuing many of the same
economically debilitating policies.
Last year he tried to solve the
transportation “crisis” by raising sales taxes.
Fortunately, the voters sent a message,
“Not only no, but ….”
Now he is promoting a tax restructuring
scheme that would make the tax system “more
equitable.” Guard
your wallet. This
sounds like a stalking horse for increasing income
tax rates on middle and higher income Virginians.
Californians have learned that high tax rates
don’t redistribute income, they redistribute
people. People
are repelled by high taxes in much the same way that
they are repelled by a swarming cloud of bees.
If the politicians raise taxes on the rich,
there will be fewer rich people in Virginia. That
also will mean fewer jobs and fewer tax revenues.
That’s exactly what happened in California.
So,
how can Virginia
avoid California’s sad demise? To start, Gov. Warner and the legislature
need to start making cuts in the budget now, so that
the fiscal crisis doesn’t cascade out of control
the way it did in Sacramento. Despite lip
service to what we are told were draconian budget
cuts last year, the budget in
Virginia
has not only grown, but grown faster than inflation
and population in every year of the Warner
administration. Borrowing
at the state and local level in Virginia
has also exploded in recent years.
This just makes balancing the budget in the
future all the more difficult.
Infuriated
voters removed Gray Davis from office because they
felt that he had allowed their state to slip into a
fiscal ditch and had no viable plan to pull the
state out. The
combination of high taxes, onerous business
regulations, runaway trial lawyers, and $50 billion
of new debt by the state government drove
individuals and business to sanctuaries of political
sanity outside California’s borders.
California’s predicament is a result of inept and cowardly
leadership and an inability of the politicians in
that state to say no to parades of moneyed special
interests. I
see the same maladies creeping into the political
structure of Virginia. In California, the bloom is off the rose.
It would be a shame if the
Commonwealth
of
Virginia
suffered the same unhappy fate.
--
November 3, 2003
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