Earlier this year, California Gov. Jerry Brown went to the residents and legislators of his state and told them the grim news that the state's budget was in horrible condition to the tune of a $9.2 billion deficit.
That California had serious economic problems was not a surprise to anyone remotely paying attention. For the past four years, residents and business owners have needed to endure tax hikes and budget cuts totaling $100 billion while they watched 24 percent of the state's tax revenue disappear and the real estate market collapse.
But Gov. Brown had a plan. He proposed a $92.6 billion budget for the year beginning July 1. To get to that point, he relied on $4 billion in savings in health and welfare programs and raises in capital gains taxes and income taxes.
Two weeks ago, Gov. Brown put up a nearly three minute video on You Tube, telling the bad news that the state was not $9.2 billion deep in red ink but $16 billion. That figure may rise again because Brown's administration was counting on at least $1.5 billion worth of capital gains taxes from Facebook employees cashing in on stock options after their recent IPO. With the drop in the company's stock price, all those tax dollars may not materialize.
Brown's video message was also a plea to the voters to pass new tax increase initiatives on their upcoming ballot. One calls for raising the state portion of the sales tax from 7.25 percent to 7.5 percent, the highest in the nation. Also on the ballot is another rise in income taxes starting at $250,000 per year with residents making more than $1 million taking a three percent hike to 13.3 percent - again, the highest state income tax in the nation.
The tax situation in California has declined so rapidly, the state now is ranked 48 in the United States for the worst tax climate for businesses (www.taxfoundation.org). This standing does not lend itself to businesses staying or moving to the state anytime soon to improve the economy.
So why should we care in Ohio? While no one would necessarily wish ill to another state, what does it matter to us if Californians can not get their fiscal house in order? The state employee pension plan is drastically underfunded? Not our problem. The welfare and health systems are next to collapse? Too bad. The school systems, universities, libraries, and prison systems have taken severe cuts over the past four years and some are on the verge of bankruptcy? Good luck.
But it is very simple why we should care what happens to California. The state's economy, at $1.9 trillion, is the eighth largest economy in the world and contributes 13 percent of the U.S. gross domestic product annually.
By comparison, the Bear Stearns debacle on Wall Street was small change when placed alongside a possible California fiscal failure. Stearns was only worth $350 billion at the height of its wealth in 2005.
What about Greece? That country has been on the verge of collapse for more than two years and is only standing today because the European Union has propped it up. Now after a radical election, their new leaders are saying they will not follow the mandated austerity measures and have put the case to the ballot. Economic news from Greece has caused stock markets all over the world to fluctuate wildly over the smallest of items and has threatened international banking systems. Some economists have even pointed to a Greek collapse as a precursor to Italian and Irish downfalls as well. Even with the way that country has moved the world economy, at $312 billion it is only the 32 largest economy in the world, one-sixth the size of California's.
And that is why everyone in the U.S. should be paying very close to attention to the West Coast. Because as much as the rest of the country might like to sit back and shake their heads in disbelief at Gov. Brown and California, officials in Washington D.C. will not be nearly as amused. If they believed that Bear Stearns and other Wall Street banks were too big to fail, what would they say about California? And if a bailout for that state is deemed necessary, who do you think is going to pay for it?