THE BLOG
07/23/2012 01:10 pm ET | Updated Sep 22, 2012

California Dreaming

California has been Americans' land of dreams for more than 150 years. From the Gold Rush days through the glittering age of Hollywood to the postwar boom, it has kept its hold on the nation's imagination. Today, the gap between image and reality is widening to the point where only fantasy can bridge it. The sunshine, sea and Silicon Valley are still there, but prosperity and hope are in short supply.

The state's economy has been harder hit than most by the great financial cum housing crisis and the prolonged recession. The numbers put the economic picture in stark relief. California's GSP, and more strikingly per capita income, stagnate below the zenith reached in 2008 while the United States' GDP as a whole has regained all the lost ground plus a small margin of growth. At least that's the case if we accept official figures at face value. Second, there remains a very big discrepancy between overall economic performance as measured by GSP and and sharply reduced tax revenues.

It is now a demonstrated fact that the turbulent events of the past four years have further skewed the distribution of wealth in the direction of the wealthiest and non-salaried workers in general. Salaried workers dutifully pay their taxes on a predictable scale year after year -- whether they be in the form of state income taxes. Automatic withholdings from paychecks guarantee that. By contrast, the wealthy, who derive much of their income from sources other than salary, are in a position avoid paying their full fair share thanks to generous provisions of the tax code and some finagling.

The drop in California's state income tax revenues disproportionate to GSP owes much to this phenomenon. Declining revenue from sales taxes is also an indirect result of diminished buying power among consumers. At the county and municipal levels, where real estate and sales taxes are the main revenue sources, government authorities find themselves in a double bind. The former have been either flat or reduced as market based assessments lower the taxed values.

This is despite the stickness of those assessments on the downside in many jurisdictions. Spending commitments of various kinds -- ranging from capital projects to salaries for public sector employees to pension obligations -- for the most part did not take into account the possibility of a prolonged downturn; indeed, they were predicated on a rise in values at a healthy pace. The same holds for sales taxes predicated on ever growing consumer purchases.

On this last score, stagnating salaries translate into a marked decline in discretionary spending -- a decline that is not offset by greater spending among those in upper income brackets. There are only so many designer clothes, fancy cars, swimming pools and antiques that they have the appetite for or the capacity to absorb.

The result California's acute financial crisis across the board. Sacramento's anguished struggle to close multi-billion dollar budgetary gaps between revenues and spending has been a staple of the Golden State's politics for years now; it receives nation wide attention. Local authorities are just as hard pressed. Four California cities -- Stockton, Vallejo, San Bernardino, Mammoth Lakes -- have filed for bankruptcy or are on the brink of doing so. Others are edging toward the financial abyss. This is after drastic cuts in public employees, social services and pension commitments. The impact on public programs has been profound. This tragedy has been aggravated by commensurate cutbacks in state appropriations. The latest crisis engendered by this budgetary arithmetic has just been resolved in the legislature after intense debate over initiatives promoted by Governor Jerry Brown and their passage in the Senate by one vote.

The centerpiece is a Proposition that will appear on the November ballot that calls for a short-term increase in the state portion of the sales tax by one-fouth of 1 percent and an increase of three percent on the income tax paid by those with earnings over $250,000. At the moment, the odds on its approval are roughly 50-50.

The prospective revenues are dedicated to schools and public safety. In particular, $125 million has been pledged for each of the State University and State College systems. If the Proposition fails, not only would those outlays not materialize but there would be a 20% increase in tuition, together amounting to approximately $450 million. Spending for higher education, and all other public services, has already been slashed over the past four years. The increased revenues foreseen by the tax increase initiative would not restore those cuts. It simply would ward off further cuts.

California, as in most states, finds itself forced to make trade-offs among various expenditure categories. The four biggest are social services, criminal justice (mainly the maintenance costs for penitentiaries), transportation and higher education. Spending on criminal justice is difficult to lower because the state is under court order to reduce crowding in jails filled by the numerous casualties of the "three strikes and you're out" law. So the future is bleak even were the Proposition to succeed -- unless the national and state economies were to be restored to a pattern of rapid and sustained growth. There is no realistic expectation of that happening.

So the California Dream may be a permanent victim of America's economic disarray that has shifted national wealth upwards, that has pulled the rug from many actual or prospective home owners, that has made higher education a luxury at a time when it is needed as never before as a precondition for having a shot at the good life. Moreover, that Dream was folded into the image of a humane society that provided aid to the poor to the frail to the elderly to the socially marginalized, as a matter of social decency. In the absence of any serious leadership in Washington on these matters, a financially strapped California is losing its cachet as a land of collective responsibility as well as the land of individual hope and fulfillment.