California has the singular advantage of being the global center of information technology. Silicon Valley started with Fairchild, which spawned Hewlett Packard and Intel, which in turn spawned Apple, Cisco and others, which in turn spawned LinkedIn, PayPal, SalesForce and so on. Like-minds gathered, and 1,065 unicorns emerged. Meta, Alphabet, and Apple alone have a combined market value over $5 trillion dollars. To put it in perspective, that’s more than the annual Gross Domestic Product (GDP) of Japan.
The government in California, like a lottery winner, has to decide what to do with the windfall. Should state politicians who had nothing to do with the wealth creation encourage the prosperity, milk it, or penalize it? California’s state budget is already disproportionately dependent on the rich. The state will have another record-high budget and surplus thanks in a large part to the tax revenue of the rich.
There seems to be little oversight on the state government spending. The private sector makes most of the money in California, however public sector employees are on average, paid twice as much as their private sector counterparts. The difference is that private sector salaries are governed by real time supply and demand in the labor markets. Public sector employees are governed by how much politicians promise to pay them. One of these practices is unsustainable.
California has the highest personal tax rate and highest sales tax rate in the United States and is very dependent on the very rich carrying the bulk of the load. The one percent in California pay half of the annual state taxes, giving a free ride to the other 99 percent. Half of that one percent make over a million dollars each year and pay $35 billion of the $90 billion in taxes collected each year. This is expected to create a surplus of $30 billion this year, yet politicians are working on proposals to squeeze the one percent even harder.
California is proposing a new double tax for the wealthy. The new tax would be 1 percent to 1.5 percent each year on everything a person owns and has already purchased with their after-tax dollars. France imposed the same tax in 1988 with disastrous consequences. The new wealth tax triggered an epic migration of its richest people out of the country. Worse, the wealth tax didn’t do what the tax-grab crowd thought it would. According to French economist Eric Pinchet, France lost more than 200 billion euro in capital flight from 1998 to 2006 and the tax cost France more than it brought in by 7 billion euro each year. President Macron cancelled the tax in 2007, saying, “It’s all well and good to want to spread wealth, but you first need to produce, to create wealth before redistributing. That’s how it works.”
California’s golden unicorns creating billions in new prosperity each year are in the crosshairs too. The proposed four-day workweek for companies with 500 or more employees would be a mandated 20 percent increase in labor costs. Overtime for those pesky projects and innovations that don’t fit in a regular day would be at a 50 percent premium. In light of innovations like the iPhone, Netflix streaming, Google’s search engine, or Pixar animation that weren’t developed by any government committee or politician, when did the government decide it had the skills to set business policy?
Loss of love for the rich in California has resulted in billions in business and wealth leaving the state. Elon Musk, Tesla, SpaceX, Hewlett Packard, Oracle, and Digital Realty Trust are all part of the California exodus to Texas. Apple is building its second largest campus in Dallas, and the Tesla Gigafactory will also be built in Dallas.
Technology giants aren’t the only companies leaving. Other cornerstone organizations like Pabst, and CBRE, the world’s largest commercial real estate firm, are also pulling up stakes. Other states are benefitting too. Disney is moving many Imagineers, their most creative and technical jobs, to Florida, and Airbnb is relocating to Georgia.
At a time when the birth rate in California is net positive, the population remains flat due to the annual exodus out. California experienced the largest out-migration of any state in 2021 with 367,299 residents leaving for more welcoming states. This is like losing the entire population of Anaheim in one year. Higher taxes seem like a quick win, but they’re unlikely to turn out well for California.
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