California has a new governor – the young and ambitious Gavin Newsom. The telegenic Newsom will likely invigorate politics after years of the less-outgoing Jerry Brown. Newsom’s policies, however, may not be so stimulating for business and investors.
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We all know the highlights. California has the world’s fifth largest economy. At some $2.7 trillion a year, it sits behind only the U.S., China, Japan and Germany. It is home to Silicon Valley and Hollywood.
There are other numbers though.
Lingering debt + big spending plans
Two years ago, the California government admitted to $1.3 trillion in long-term debt – while others say it is well over $2 trillion, including more than $1 trillion in a growing pension debt. In addition, California infrastructure deficit is pegged as high as $737 billion.
Enter Gavin Newsom, now California’s 40th governor, and his spending plans.
Newsom reportedly has a team of 30 people working on a statewide health-care program. Keep in mind, the last such bill that passed the California legislature, but couldn’t get Brown’s support, came with a $400 billion price tag - spending that would have tripled the existing $200 billion California budget (not to mention creating uncertainty in the United States's largest state health-care market).
As for providing other benefits, Newsom wants some $1.8 billion on an array of programs designed to boost California’s enrollment in early education and child-care programs.
Amid so much political ambition and promises, the question is how to pay for it all.
BIG tax plans
Newsom is inheriting a “surplus” of nearly $15 billion. But that won't be nearly enough. So, Gavin and his legislative mates already have tax plans – BIG tax plans.
According to Newsom, “some 85 percent of California’s economy is not captured by the current tax code.” Think about the tenor and bias of that thinking.
Perhaps the No. 1 target of Newsom and his allies is California’s last bastion of tax restraint – Proposition 13. This measure limits property tax increases to 2% a year on commercial and residential property. Newsom says that “everything would be on the table,” including Prop. 13, and supports a 2020 ballot measure to take away Prop. 13 protection for commercial property, which threatens property values.
Of course, that won’t be the only tax increase on the table. Last year, a California bill would have levied a 17 percent state tax on carried interest. For years, some California Democrats have pushed a service tax on “high-end business services, such as those provided by lawyers, consultants, and accountants for corporations and other high-income businesses,” because “80 percent of the state’s economy was related to the sale of services, not goods, and most of these services are untaxed,” according to one of the proponents.
Forecast: higher taxes and MUCH higher spending
All in all, no one knows exactly what’s ahead for California but I forecast that higher spending, perhaps much higher, and higher taxes, also perhaps much higher are on the way. It is also apparent that those higher taxes and spending won’t be directed to retiring existing debts.
The big tax proponents perhaps will never understand that extracting billions out of the private sector, or even just the threat of it, weakens the prospects for business growth -- short and long term. Undoubtedly, that is why 1,800 companies either relocated or disinvested in California in 2016 alone,and since then the state has lost major companies such as McKesson, Charles Schwab, Lyft and dozens of others, including, ironically enough, Robinhood.
Given all of Gavin Newsom’s political ambitions, he could well exaggerate that exodus.
Thomas G. Del Beccaro is the author of The Divided Era.