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California is Greece, But with Capital Gains

California not only has the highest poverty rate in the U.S. at 23.4 percent, but that rate is now also higher than Greece, at 22.3 percent.

With huge capital gains rolling in, the Democrat-controlled state legislature has been using “one-time-taxes” to spike welfare benefits as a magnet to attract more Latino illegal immigrants that they expect will vote reliably for Democrats. But with a “structural deficit” that relies on $15 billion in capital gains taxes to balance, California will be as broke as Greece if the stock market ever tanks again.

California Democrats passed Proposition 30 in late 2012, just as Silicon Valley tech stocks exploded higher and hundreds of companies went public. Residents of the Golden State saw their top marginal tax rate jump by 33%. With California capital gains taxed at the same rates as income, up to 13.3 percent, California has the second highest marginal tax rate in the industrialized world, behind only Denmark.

California tax collection through April was up $10 billion for the first 10 months of the fiscal year, mostly due to capital gains taxes. Collection of capital gains taxes jumped from $4.7 billion in 2010, to 11.9 billion last year, and could hit $15 billion this year. But this one-time tax is highly volatile, falling from $10.9 bilion in 2007 to $2.3 billion in 2009. Consequently, a down stock market will quickly implode the California state budget.

With $4 billion in “extra” one-time capital gains at the fiscal year’s end, Governor Brown and the legislature intend to save only $575 million for a “rainy day fund,” and claim they are spiking spending on welfare and entitlements to “fight poverty.”

The Governor and legislature have agreed that about $380 million will be mailed out as checks to the working poor; the state’s hourly minimum wage will jump from $9 this year to $13 in 2017; 240,000 illegal immigrant children will receive Medi-Cal health coverage; adult illegal immigrants will enjoy deeply subsidized private health insurance; child-care providers can unionize; welfare payments will increase when recipients have more children; and illegal immigrants will be eligible for new affordable housing.

California politicians used to focus spending on the middle class. But since Brown was elected in 2010, the state’s middle class has shrunk from 46.7 to 43.5 percent of the population. Average incomes by 2013 had fallen by $5,255, and those spending at least 30 percent of income on housing leaped by 20 percent to 44 percent of state residents.

The main reason for the California middle class’s collapse is the state is now home to more than 12 million immigrants, about one in four of the foreign-born population nationwide. Half of the children in California had at least one immigrant parent, with about 57 percent Mexicans, 23 percent from another Latin American country, 10 percent from Asia, and only 5 percent from Europe and Canada.

The Department of Commerce’s National Bureau of Economic Research (NBER), in a report titled “Immigrants Tend to Live in High Welfare Benefit States,” documents that by offering the nation’s richest welfare benefits, California is part of “a ‘striking and easily observable clustering of immigrants in high-benefit states.’” As California rose from offering medium benefit levels in 1970 to “almost the most generous [benefits] in the nation” by 1990, the benefit levels served as a “magnet” for less-educated immigrants.

NBER found a direct correlation between the increasing relative generosity of California’s welfare system, and the state’s record in attracting immigrants. For immigrant heads of households who arrived in U.S. in the five years prior to the last census, 45.4 percent of all U.S. immigrants that were receiving welfare lived in California.

When the American National Election Study asked Latinos their views about the free market versus big government solutions to problems, only 17.9 percent responded “the less government the better,” and 85.3 percent said “a strong government involvement is required to handle economic problems.” This is all music to Democrat ears.

The Associated Press ran the headline this weekend: “Reducing Poverty a Budget Priority for California Democrats.” That noble statement ignores the fact that even the Department of Commerce under Barack Obama acknowledged that the California legislature is using welfare spending as a magnet to recruit Latino illegal immigrants.

Like gamblers on a hot streak that seem to lose all sense of reality, and double-up their bets against high odds, California’s Governor Brown and the Democrat-controlled legislature are doubling-up spending on the welfare “magnet.” But if the stock market takes a nasty hit and state revenues plunge, California will be just as broke as Greece.

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