With the “one percent” paying more than 50 percent of state taxes, a sustained stock market crash would shrivel California’s “one-time” capital gains taxes and throw the Golden State back into a financial crisis.
As Breitbart News recently warned, in “California is Greece, but with Capital Gains,” if the China stock crash continues, California could soon face a world of bad debt.
Sacramento public policy has created a barbell economy by wiping out the middle class through a combination of ferocious tax increases, ludicrous regulations and ultra-high welfare payments. As a result, California has an uber-wealthy class of billionaires living in sheltered liberal enclaves, while achieving a poverty rate of 23.4 percent that is the highest of any state in the U.S. and higher than Greece’s 22.3 percent poverty rate.
The top 3 U.S. industries for producing billionaires are 1) investments (110); 2) technology (84); and 3) media (43). That explains why California, with 141 billionaires is still the top state for those who want to strike ten digit gold in America. California actually has more billionaires than any other country, except the U.S. and China (and that may be changing).
With half of the state’s billionaires living in the Bay Area and Silicon Valley, California also has two of the three cities with the highest concentration of billionaires on the planet. The total combined wealth of California billionaires is estimated to be $560.1 billion, which is more than the GDP of 49 countries, including Argentina, Poland and Taiwan.
So the state is trying to take full tax advantage. California Democrats passed Proposition 30 in late 2012, just as Silicon Valley tech stocks exploded higher and hundreds of companies started going public.
Residents of the Golden State saw their top marginal tax rate jump by 33%, with income and capital gains taxed at up to 13.3 percent. With the higher tax rates, California tax collections for the fiscal year ending in June were up over $13 billion to $112.7 billion, versus the $99.6 billion the prior year. Over $10 billion of that increase came from personal income taxes, mostly from capital gains.
California politicians once focused spending on the middle class. But with capital gains jumping from $4.7 billion in 2010, to 11.9 billion last year, and over $15 billion this year, the Democrat-controlled California Legislature has used this “one-time-tax” to spike welfare benefits that serve as a magnet to attract Latino immigrants they expect will eventually be reliable Democrat voters.
Since Governor Brown was elected in 2010, the state’s middle class has shrunk from 46.7 to 43.5 percent of the population. California’s income average has fallen by $5,255, and the proportion of residents spending at least 30 percent of income on housing leaped to 44 percent.
The U.S. National Bureau of Economic Research, 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 in the nation” by 1990, the benefit levels have served as a “magnet” for less-educated immigrants.
With at least $6 billion in “extra” one-time capital gains compared to the last fiscal year’s budget, Governor Brown and the Legislature only moved $575 million into a “rainy day fund.” The rest was spent on welfare and entitlements to supposedly “fight poverty.”
California’s “extra” spending has been funded with volatile capital gains tax collection that mostly came from hundreds of Silicon Valley tech initial public offerings (IPOs). The last time the stock market crashed, new tech IPOs died and California capital gains tax collection plunged from $10.9 billion in 2007 to $2.3 billion in 2009.
California spent all but a half of a billion dollars of its $15 billion in one-time capital gains collection last year. Consequently, the state is vulnerable to a $12 billion deficit if the China stock market crash is like the 2008 to 2010 financial crisis. With total employment spending of only $10 billion, in a sustained stock market crash California could terminate every state worker and still not be able to balance its budget.