Failed states: California is overregulated, overtaxed, and just plain over

First of an occasional series

In July, when Gov. Arnold Schwarzenegger called for a "Commission on the 21st Century Economy," it was hoped the group of experts could provide a way to finally resolve California's budget woes.

When the commission issued its report at the end of September, however, the recommendations fell to the floor with a resounding thud. Defenders of California's status quo in the state legislature in effect said "no way."

Today, California is a by-the-numbers state tragedy. Unemployment is higher than 12.2 percent as of September. Business costs are almost 23 percent higher than other states on average.

Migration out of the state is at an all time high. A map by United Van Lines shows a strong demand for moving trucks as residents leave California for other destinations, particularly Texas.

More Californians would leave if they could sell their houses, but the Golden State's real estate market has tanked as well. It has the fourth-highest foreclosure rate of any state.

All of these indicators are the product of a toxic mix of liberal Democratic government -- a steep progressive tax rate, an uncompromising regulatory regime, and budget-busting programs like MediCal (California's Medicare system), generous state welfare benefits, and extraordinarily costly pay and pensions for state employees.

The state's fiscal plight is so bad that earlier this year it had to resort to issuing IOUs when state coffers ran dry. According to the governor, California will have another budget deficit of as much as $7 billion through June, on top of the $7.5 billion deficit projected for the following year. That will create a shortfall of almost $14.5 billion.

And thanks to the special interests that control the state legislature, nothing is likely to change any time soon.

For example, in May, Tom Campbell, a gubernatorial candidate, former California director of finance, and five-term member of Congress, wrote a state initiative for budget reform, Proposition 76.

Campbell's proposal required significant state budget cuts and included a provision allowing the governor to reduce appropriations of employee compensation and state contracts. Unfortunately, the proposal was killed, 37 percent for, 62 percent against.

Public sector employees unions led the all-out campaign by the special interests in the legislature to kill Prop. 76, even though it would have led to a state budget surplus.

This was possible because the public sector unions don't have to raise money -- they merely have to pour member dues, fueled by tax dollars, into whatever cause they like.

There are also a lot of these dollars: Today, California's government work force is 57 percent unionized, nearly double the national average, and their compensation has increased faster than inflation and population growth.

Thanks to their obstruction, the government has continued to grow as the state borrows heavily while relying on accounting tricks to justify its existence. The state touted as a solution the early release of prisoners in August, which would result in $1 billion in savings. Welfare and MediCal, on the other hand, cost a combined $57 billion and are driving the state bankrupt.

The state has bitten off more than it can chew. In an interview with The Examiner, Campbell puts it delicately: "We were overly optimistic about the revenue from the income tax and the sales tax."

He goes on to describe that this is what comes of relying on a mere 3 percent of taxpayers to fuel 50 percent of revenue from income tax. When the stock market dives, so does the eighth-largest economy in the world.

"California companies are building factories and expanding in Washington state, Nevada, Texas and Oregon," Campbell sighs. With regulations that require employers to pay overtime after eight hours of work (as opposed to after 40 hours like in most other states, which would allow shifts to be distributed according to need), he describes the business climate as "poor."

To comply with the state's general plan for building residential units, for example, construction companies must build close enough to mass transit as determined by the state Air Resources Board to avoid the production of greenhouse gases.

California's politicians have decided to spend every dollar the state gets (and many it doesn't get) to finance an ever-expanding menu of programs to meet every citizens' whim.

California now has the lowest credit rating of the 50 states, the consequence, it appears, of a government that can't say no to special interests.

J.P. Freire is associate editorial page editor of The Washington Examiner. He can be reached at jpfreire@washingtonexaminer.com.