Tax The Rich What New York Can Learn From California

Did anyone catch New York mayor Michael Bloomberg this week as he blasted proposed tax increases to the top 1% of his states earners?

“One percent of the households that file in this city pay something like 50 percent of the taxes. In the city, that’s something like 40,000 people. If a handful left, any raise would make it revenue neutral,” the billionaire mayor said on his weekly radio show.

So it does raise the question will people leave? Here are a couple of articles supporting Bloomberg's assertion:

“California’s Gold Rush Has Been Reversed: Entrepreneurs are fleeing heavy taxes in the state.”
Wall Street Journal

“Exodus From California.”
National Review Online

For years we have kept hearing from the "sell side" and "buy side" alike how California continued to have positive demographics which supported home building and housing valuations. Needless to say "things were not different this time". From bank failures to foreclosures to ghost towns - California continues to crumble. The state has a $42 billion deficit (this estimate has grown from the mid teens estimate a few months ago), sports the 4th highest unemployment rate in the union and illigal immigrants are leaving in record numbers. Does anyone think this will lead to a strong housing market or banking system? Where are all those "great franchises". It would seem to me that the sheer number of banks within California has to be reduced. As with the overcapacity in housing we also have an overcapacity in banks. Either we will have too many banks fighting for too few loans and earnings will be dismal for years to come or we purge the system and get it healthy again.

Here are a few salient points on the demise of California. The bullet points presented are from a California Business Roundtable.

1. The cost of doing business in California is 30 percent higher than the western-state average.

2. Almost 40 percent of the California decision-makers participating in the Roundtable survey plan to “outsource” jobs from California to other western states, preferably Texas.

3. Half of the companies have “explicit policies to halt employment growth in California while less than five percent of companies have retention policies in place to keep jobs in California.”

4.California’s “regulatory environment is the most costly, complex and uncertain in the nation.” Regulatory costs are 105 percent higher in California than in other western states.

It appears the slippery slope to social unrest has begun. Both at the Federal and State level governments are looking to increase revenue any way possible. It is hard to see how this situation ends well. As the economy continues to unwind this year (both equity and house prices moving lower) look for business and taxpayers alike to do whatever possible to preserve their balance sheets.

Be careful New York.