05.25.2012 15

Consider California, Illinois EU-Style Failed States

As originally published at Investor’s Business Daily.

By Howard Rich — The euro zone isn’t the only economy reeling from “failed states.” The United States has several of its own — most notably California and Illinois.

According to the CIA’s world factbook, California’s economy is the ninth largest in the world with a gross state product of $1.9 trillion. Illinois’ economy is the world’s 23rd largest economy with a gross state product of nearly $630 billion.

These are impressive figures, to be sure, but both states have seen their global position slip in recent years — and further erosion is likely thanks to poor fiscal stewardship and anti-competitive tax increases.

Both California and Illinois are hoping that tax hikes will bridge gaping deficits created by politicians’ failure to rein in government growth — including expanded entitlements and exorbitant public sector pensions.

Does any of this sound familiar? It should. This is precisely the sort of unchecked public sector growth that has landed Greece in its current predicament — a worsening crisis that has pushed the entire euro zone to the brink of collapse.

“Public payroll expenses (salaries and pensions of civil servants) rose in Greece from 38 percent of state revenue in 2000 to 55 percent in 2009,” reports Antonis Kamaris of the Council on Foreign Relations. “Compounding this trend, local elites became hostile to any coherent national reform effort, precisely to preserve the system that now privileged them.”

Greece relied on international bailouts and numerous new tax hikes to try and extricate itself from this Keynesian-induced morass — but these measures only further weakened its economy.

Again, sound familiar? It should.

Earlier this month, California Gov. Jerry Brown revealed that his state’s budget deficit had swollen to $15.7 billion — a 70 percent increase from Brown’s own projections just five months earlier. Estimates from California’s nonpartisan Legislative Analyst’s Office indicate that the state’s deficit could be even higher — perhaps exceeding $17 billion.

Brown blamed this worsening fiscal prognosis on lower-than-expected tax collections (further evidence of the punitive nature of California’s high marginal income-tax rates). Of course Brown’s solution to this dilemma is to further weaken the Golden State’s deteriorating competitiveness by following the failed Greek model.

“This is not Europe,” Brown told CBS’ Charlie Rose recently. “This is still the Wild West, and we’re going to prove to the rest of this country and the world that we know how to do it.”

But does California really know “how to do it?”

Brown is pushing to raise California’s sales tax (already the highest in the nation) from 7.25 percent to 7.5 percent. He also wants to slap higher income-tax rates on those making more than $250,000 — while raising the state’s marginal income-tax rate on millionaires from 10.3 percent to 13.3 percent (thus establishing the highest state income-tax rate in America).

Californians don’t have to look all the way across the Atlantic to see that this approach is destined to fail. They need only look halfway across their own continent.

In Illinois, income tax hikes haven’t solved the state’s budget crisis. That’s because most of the revenue generated by a 2011 marginal rate hike was earmarked for a $4.5 billion pension payment — not the state’s $5 billion deficit or its $9 billion backlog of unpaid bills.

Of course this $4.5 billion barely made a dent in the state’s long-term pension problem.

According to a 2011 report from the Pew Center on the States, Illinois’ total pension liability grew by 110 percent between 1999 and 2008 — leaving the state with a $119 billion unfunded liability.

The report found that just 54.3 percent of the state’s promised benefits were funded — the worst percentage in the entire nation. And that was before Illinois borrowed money to pay its pension costs in 2009 and 2010.

Not surprisingly, California and Illinois also have the nation’s two worst credit ratings — resulting in higher borrowing costs that further compromise their fiscal health.

Like the disaster in Greece — budget implosions in California and Illinois were completely avoidable. Politicians had years to right their respective fiscal ships, but chose instead to continue their “high time” spending. Once crisis hit, these same politicians then compounded their problems by relying on bailouts and tax hikes when they should have been undertaking long overdue reductions in the size and scope of government.

The lesson is clear: Raising taxes to support the unsustainable growth of an already bloated, debt-addled government is only going to make a bad situation worse. What’s required is a fundamental rethinking of what government should — and shouldn’t — be doing in the first place.

Rich is chairman of Americans for Limited Government.

  • Skyknight2

    I have lived in California for 40 years and the people in this state are just plain stupid and have short memories. They fell for the BS that the Unions put out and re elected Brown as Governor and don’t remember the damage this Communist did to California when he was Governor last time.
    The State is bankrupt and Brown is going to push it over the cliff, then get his buddie Obama and the Feds to bail him out.

  • marineh2ominer

    Socialism works ? WHERE ?

  • cmjay

    CALIFORNICATION  created its own demise  and will soon IMPLODE. Keep doing the same thing over and over and expect a different result – we all know this is stupid except them.
    Unfortunately, you can’t fix STUPID.

  • Nam 67 & 68

    The people in California and Il. are stuck on stupit.They will continue to vote the dummiecrats in office.They screw over the people year after year.

  • Anne

    I was born in California in 1948, yes, that makes me an elderly baby boomer. This used to be a wonderful state with a great school system. Then somehow the progressives slowly took over and the teachers union grew stronger and stronger. Our schools are now a joke and the budget is so far out of control it will never be fixed. I heard one of our old leaders say that Sacramento sees things through rose colored glasses because we are such a great state. Jerry Brown still wants a high speed rail that goes to Vegas that will cost us a fortune. The trouble is it starts in the middle of nowhere. Victorville, Ca might be a nice little city, but a train stopping there won’t do us any good. We have a state cap and trade law and regulations that cover everything. Taxes are going up higher and higher while people are leaving the state. This is a perfect example of what progressives, both dems and republicans, will do to this nation. Wake up people. Does anybody really want the entire nation to look like California? It’s time to take off the rose colored glasses and face reality. It might be fun to pretend like everything is ok, but the truth will eventually smack you in the face!

  • Ash McGonigal

    California’s failures are a result of conservative policy, namely the asinine requirement of a supermajority for any revenue increase combined with a property tax structure that means a building built in 1977 can’t be taxed at a value higher than what it was worth in 1977 unless it’s sold to a new owner, which resulted in virtually all buildings of value being incorporated, so instead of selling the building you just sell the corporation.

    Neither California nor Illinois are as failed of states as Kansas and Wisconsin. Kansas isn’t there yet, but in just a few years we’ll have a $2.5 billion budget deficit thanks to our governor, who claims to be a Christian, but best anyone can tell his only religion is evangelical stupidity. Wisconsin, of course, is back in the throes of recession after their incompetent governor decided to take a break from helping pedophiles defraud veterans to screw the state over.

  • Sorry Ash, California’s Prop 13 that established an annual cap on property tax increases wasn’t set at zero it was set a 1%.  Therefore an annual property tax of $1,000 in 1977 is now $1,663 (just using $1,000 for ease of demonstation) assuming the owner didn’t sell or improve the property.  Whenever a property was sold, the sale price became the tax base and the rate was 1% of the sale price.  Of course, over the past 35 years some 12 million homes were either purchased as new construction or resales and when that property was sold its sales price established the tax rate.  Even at current depressed prices some 25,000 homes were sold in January 2012 at an average sale price of $260K.  That sets the average property tax rate at $2,600 and the average tax rate for those same homes next year will be $2,626 regardless of whether or not the value of those homes drops.

  • Mcbee55

    Those who pay the exhorbitant CA taxes are now part of an exodus out of CA.
    Jerry Brown can’t stop that! If the exodus continues, what will be left in CA will be more “takers” than “makers.” Many people like CA for its weather, but when they consider how costly it is, they’ll start thinking about earthquakes and drought, then they’ll be gone.
    Even now, many CA businesses have relocated to Texas, which doesn’t tax its citizens to death. The question: How does Texas do it and CA can’t? Could it be the difference between a TX Republican administration and CA’s locked-in Democrat administration that continues to do the same things and expects different results? 

  • Sharank251

    so they will solve the problem by electing jerry brown governor? whats wrong with this picture? i can just hear the thought process. ok we’re broke lets elect the commy brown as governor. the guy that hasnt had a thought in his head since he decide to leave the seminary. God help America.

  • sean murry.

    I live here in Illinois ti is true the state has failed recently they cut medicare for the poor here in other words they can die.

  • I wasted over 20 years in the sewer called Illinois. While Chicago is a nice city to visit, anyone not looking to get the hell out of that state should have their head examined. It’s not a state to buy property or raise a family.

  • Typical liberal garbage. You ignore facts and launch a disgusting personal attack void of facts. Way to go pinhead.

  • Tea Leaf

    I also once lived in California, for about 60 years. I was once a proud native Californian, my son is the fifth generation. I watched the politicians since Ronald Reagan destroy the once “Golden State”, with few exceptions their every action insured the slow but steady destruction.
    Unlimited pandering to foreign nationals (illegals) and any other person seeking financial independence through Ca.’s liberal no questions asked welfare gravy train. The entire state is now teetering on collapse with a deteriorating in furstructure. Roads, streets and highways are cratered with pot-holes and whole communities appear to have not invested a single dollar in home or community inprovements. A sad ending for a state who now will seek funds from a broke federal government, get in line Ca. most demonrat state governments will already be standing in the beggar line ahead of you. I say goodbye! I won’t miss you and your on your own!!

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