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Poverty's Grip on California is Man-Made

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Poverty's Grip on California is Man-Made

May 24, 2014

New York Times reporter Jennifer Medina told a heart-wrenching story of Mary Carmen Acosta and her husband Sebastian Plancarte, who lost their jobs and their home and now make their living east of Los Angeles selling popsicles.

Her article points out many hardships faced by some of California’s residents – lack of jobs, high cost of energy, and low economic mobility.

Medina suggested that California’s low-skill workers, many of whom are immigrants, have been left behind during the economic recovery and need more government help. But the Golden State’s problems are self-inflicted. Over in Texas, which also has a large immigrant population, economic growth is faster, the unemployment rate is lower, and jobs are plentiful.

Toyota recently announced it would move its U.S. operations headquarters from California to Texas. The makers of Sriracha hot sauce are at risk of being forced out of California, and are being aggressively courted by Texas and other states. What state (besides California) would drive out job-creating businesses?

These will not be the last major companies to make the move from the high-tax, high-regulation state. California is ranked 47th for business outlook this year by the American Legislative Exchange Council. Arizona and Nevada are ranked 7th and 8th, respectively. Texas is ranked 13th and North Dakota is 4th.

California could help Mary Carmen and Sebastian by drilling in its Monterey Shale oil reserves – instead of banning exploration as the Los Angeles City Council has moved to do. Over 15 billion barrels are estimated to lie beneath 1,750 square miles. California could follow in North Dakota’s footsteps in energy production, and Sebastian could be earning $120,000 a year in the oil and gas sector, as many North Dakota residents are doing.

Developing the Monterey Shale would create jobs and lower California’s unemployment rate from its current level of 8.1 percent. North Dakota’s rate is 2.6 percent, the lowest level in the country.

Misguided energy policies in California also lead to higher prices – especially for low-income families who spend 24 percent of their incomes on natural gas, electricity and gasoline.

Despite the hardship higher energy costs bring, California continues to raise its Renewable Portfolio Standards. The state’s electricity companies have to provide an increasing percent of their power from green energy sources. By 2020, 33 percent of energy generated must be from renewable sources.

California’s tax system is hostile to new business creation. Its top individual rate is 13.3 percent – the highest in the nation. Many small businesses file as sole proprietorships or partnerships, so high personal tax rates hinder job creation. California also has a flat corporate tax rate of 8.84 percent – the 10th highest in the nation.

Overzealous regulations – from California’s mistitled “consumer protection statutes” which allow for endless frivolous lawsuits, to the state’s senseless environmental regulations – discourage business creation and drive out established companies.

From 2000 up to 2010, the latest data available, California lost 410,000 residents to its low-tax neighbors, Arizona and Nevada. These residents took over $12 billion in adjusted gross income with them. Another 225,000 residents and nearly $4.5 billion went to Texas. This money could have benefited California’s economy through residents purchasing goods and services at local stores and financing business creation and expansion. However, in this case, one state’s loss is another’s gain.

California is running out of time to right its course. The state has the highest level of unfunded pension liabilities in the United States at $650 billion. The state would have the revenue to cover pensions if tax rates were lowered and regulations were rolled back, leading to higher tax receipts that accompany economic expansions. It is not possible to cover this shortfall by raising taxes even further. Doing so will only cripple future economic growth and force more residents out of the state.

California has brought undue suffering on Mary Carmen and Sebastian, and millions of other residents, through its flawed policies. This has led to economic stagnation and capital flight. It is not surprising that residents cannot find jobs and are reduced to selling popsicles.

Many states offer roadmaps to improvement.

If California continues to resist common-sense economic reforms, one piece of advice could help Sebastian and Mary Carmen – move East.


Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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