Golden Debacle – The California political machine is no model for the nation
Kamala Harris’s presidential campaign has been light on policy specifics, but her political inheritance provides clues. Harris is a creature, after all, of the California political machine. What real-world results has that machine produced?
The Golden State still has a powerful economic base, though its government budgets are once again in deficit territory. California’s success, such as it is, comes from its fantastic weather and abundant natural resources, as well as the decisive vision and accomplishments of its leaders in the 1950s and 1960s. That earlier generation of politicians, including many Democrats, built the freeways, water projects, and technical universities that, even now, neglected and badly in need of upgrades, still constitute the backbone of the state’s economy.
The days when California politicians were motivated by the public interest are long past. For low-income households that aspire to upward mobility, and for middle-income households that want to maintain their financial independence and preserve their standard of living, California has nothing to offer. And for independent contractors trying to make a living, or small businesses trying to hang on to their employees and customers, the state is actively hostile.
It’s instructive to focus on California’s business climate. If businesses large and small can thrive, most everything else falls into place. To have successful businesses, a state needs reasonable regulations, law and order, and a well-educated workforce. When businesses can compete, the cost of living comes down. California has none of these things. And the more its state and local governments expand, the worse conditions get.
The first sign things are awry is an ongoing exodus of successful businesses. According to a list compiled by the Sacramento-based Center for Jobs and the Economy, over 500 companies have either left the state completely or opted to expand their operations elsewhere while shrinking their California operations, since 2020. The list includes scores of household names: Aerojet, Allegiant, Airbnb, Alphabet (Google), Amazon, Amgen, and Apple—and that’s just the A’s. It runs the gamut, from energy (Chevron) and civil engineering (Bechtel) to arts and entertainment (Disney). Indeed, it’s a challenge merely to find a large company that wouldn’t be on this list.
Even companies physically tethered to the land—agriculture, logging, housing—are getting out. Soper-Wheeler, once a major logging concern in Northern California, began moving operations to New Zealand in 2001 and completed the process by 2020. Publicly traded housing developers, accountable to shareholders, lack a strong incentive to invest in California because the returns are so much greater in states with less regulation and less litigation.
To be sure, California remains an economic behemoth. According to the California Department of Finance, the state’s GDP in 2022 was $3.6 trillion, highest in the nation. California’s per capita GDP was an impressive $92,308, eclipsed only by New York, Massachusetts, and Washington State. But these statistics belie reality for Californians, who face an astronomically high cost of living. As of March 2024, the state has the nation’s highest unemployment rate, lowest job growth, lowest income growth, and highest poverty rate. Its state budget faces ballooning deficits, and Chief Executive just ranked it the worst state in America to do business for the tenth year in a row.
At the same time, state government spending in California has dramatically increased. In just the last ten years, and adjusting for inflation, the California State General Fund—the budget that allocates taxpayer dollars to countless state government programs and departments—has nearly doubled. In 2013, the state’s General Fund expenditures were $96.3 billion. Compare that with the General Fund in 2023 of $226 billion. Even after adjusting for inflation, that’s a 79 percent increase in just ten years.
The per capita increase in California’s General Fund spending is also significant, because California’s population hasn’t grown much since 2013. Ten years earlier, it was 38.3 million. In 2023, it was up to 38.9 million, an increase of just 1.9 percent. Over the past three years, California’s population has actually dropped by nearly 600,000 residents since reaching a high of 39.5 million in 2020.
Additional cause for concern is growing income inequality. While California’s per capita real income grew over the past 20 years from $65,000 in 2000 (expressed in 2023 dollars) to nearly $86,000 in 2020, most of that rise has gone to the top income groups. For example, since 2000, the top 10 percent of households by income in California have seen their incomes rise on average by 34 percent, whereas the bottom 10 percent have seen an increase of only 6 percent. Overall, California has one of the highest rates of income inequality in the United States.
The Small Business Regulation Index, published by the Pacific Research Institute in 2015, ranks California’s as the worst business climate for small firms. These findings were corroborated by the Small Business and Entrepreneurship Council in a 2019 study that put California in 49th place, and a 2021 study on the best and worst states for entrepreneurs conducted by the Cato Institute that put California 48th among the states.
California’s dismal treatment of small businesses disproportionately harms Latinos, whose businesses tend to be smaller and less capitalized. California’s recently mandated $20 minimum hourly wage for fast-food workers, for example, may help some individual Latinos. But it could also reduce total employment and threaten the livelihoods of smaller franchisees, many of whom are minorities. Since California is destined to be predominantly Latino—they now constitute 56 percent of students enrolled in K-12 schools—the state’s evident hostility toward small businesses is an attack on the next generation and the future.
California has America’s highest income tax burden, and every year, the state ranks at or near the bottom of the Tax Foundation’s report, the “State Business Tax Climate Index.” The most recent report, issued in October 2023, ranked California 49th in individual income tax, 45th in corporate income tax, and 47th in sales tax. While California was rated average in its property tax rate—only 22nd—excessive real estate values in the state negated that advantage, since the rate had to apply to a much greater assessed value compared with similar properties in other states.
These direct taxes are only part of what California imposes on its businesses; stealth taxes and fees abound. From a schedule published by the California Department of Tax and Fee Administration, no fewer than 28 categories of fees are listed. Notable examples include a 1 percent assessment on all purchases of lumber products, a 2.9 percent “timber yield tax,” an “occupational lead poisoning prevention fee,” a “marine invasive species fee,” an “energy resources surcharge,” a “natural gas surcharge,” an “underground storage tank maintenance fee,” a “water rights fee,” and so on. One of the costliest sets of taxes affecting Golden State businesses are the $0.57 per gallon gasoline tax, the $0.44 per gallon diesel fuel tax, and the $0.18 per gallon tax on aviation fuel. These fuel levies, the nation’s highest, add to the cost of virtually all transportation of finished goods and value-added materials used and sold by businesses. Also adding to the cost of doing business are the state and local taxes on utilities and telecommunications, which get automatically added to monthly bills. Finally, the many state agencies, from the Department of Fish and Wildlife and the California State Water Board to the California Air Resources Board, also impose charges.
The many ways that CARB extracts payments from California’s businesses exemplifies how pervasive the state’s reach is into businesses of all sizes. CARB is empowered to adopt a schedule of fees on every “mobile and stationary source” of greenhouse gas operating in the state, from small watercraft to diesel trucks and railroad locomotives. The process of applying for a license from CARB to operate a mobile or stationary source is complicated; so, too, is the process of gaining approval and making the obligatory payments. If the owner of the equipment in question does not successfully navigate this gauntlet, enforcement is swift, the fines are steep, and the appeals process is, well, complicated.
Next, consider cap and trade, established by the California state legislature as a means to lower carbon-dioxide emissions eventually down to “net zero.” The first auction of “allowances” to emit CO2 was held in 2014, and the auctions have been held quarterly ever since. The auctions now raise between $3.5 to $4.5 billion per year. A report issued last year by the California Office of Legislative Analyst stated: “CARB estimates that the cap-and-trade program adds about 27 cents to each gallon of retail gasoline sold in California.” Costs passed on to consumers and businesses come from all the purchasers of these emissions allowances, which include natural gas electricity-generating plants, natural gas suppliers for heating and cooking, oil refineries, cement manufacturers, and oil and gas producers—literally every essential resource needed by every other business in California.
The sheer complexity of California’s bureaucracy is mind-boggling. If you have a business, your activities will be subject to oversight by dozens of state agencies. Do you want to work as a barber or hair stylist? Better check with the Board of Barbering and Cosmetology. If you have employees, don’t be surprised if you hear from the Occupational Safety and Health Division, the Labor Standards Division, the Division of Workers’ Compensation, and the Employment Development Department. If you have premises, the Office of the State Fire Marshal. If you use chemical hair products, the Department of Toxic Substances Control. If you have trash, the Department of Resources Recycling and Recovery. If you sell hair products, you’ll have to collect sales tax and file reports with the State Board of Equalization. And, of course, you have to register your corporation with the California secretary of state and pay taxes to the Franchise Tax Board. That’s before county and city governments get involved.
Anyone running a business that actually produces tangible products will face yet more scrutiny. Are you laying a foundation? Building homes, or building a factory, cutting timber, running cattle, farming, mining, or quarrying? In addition to those listed above, here are some of the additional agencies that may demand your attention: the California Biodiversity Council, the Department of Fish and Game, the Board of Forestry, the Office of Tribal Advisor, the Department of Food and Agriculture, the California Natural Resources Agency, the California Air Resources Board, the Agricultural Labor Relations Board, the Contractors State License Board, Cal Fire, CalRecycle, the Industrial Welfare Commission, the Department of Insurance, the State Lands Commission, the State Mining and Geology Board, the Department of Pesticide Regulation, the Department of Water Resources, the Water Commission, the Water Resources Control Board, and any number of state-run conservancies. Is your operation located near the ocean? Expect to deal with the Coastal Commission.
It’s bad enough simply trying to run a business in the face of this vast regulatory onslaught. Compounding the problem are two further layers of deadweight: the fact that thresholds for violations are set at unreasonable (if not impossibly low) levels, with punitive fines for violators. And the mentality of agency staff is best described as indifferent, if not hostile. Such is doing business in California. No wonder millions of people are leaving.
All this barely scratches the surface of California’s dysfunction, brought about by a political machine that has exercised absolute power for a generation. The only winners in this scenario are those behind the machine. That would be the people running the biggest corporations and the biggest banks, along with California’s billionaires. Their financial strength gives them the economies of scale necessary to comply with all the regulations and the sophistication to exploit loopholes in the tax code. Meantime, they can consolidate and expand their wealth as they acquire the distressed assets of their smaller competitors driven into bankruptcy or short sales.
And, of course, benefits accrue as well to the people running and staffing the ever-growing machine: politicians, heads of agencies, and hundreds of thousands of rank-and-file government bureaucrats.
What has happened in California is a travesty of capitalism and democracy. Meaningful political and economic power has passed upward into the hands of a small elite. Citizens reliably support Democrats by 60–40 margins. Republicans hold only 20 percent of the seats in the state senate, the state assembly, and California’s seats in the U.S. Congress. The state hasn’t had a Republican governor since the 1990s, unless you count Arnold Schwarzenegger. Kamala Harris’s political career was forged in a political machine calibrated to deliver bad results. And in California, the results speak for themselves.
This article originally appeared in City Journal.
Edward Ring is the director of water and energy policy for the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, National Review, City Journal, and other media outlets. Ring is the author of several books, including “Fixing California – Abundance, Pragmatism, Optimism” (2021), “The Abundance Choice – Our Fight for More Water in California” (2022), and “Solutions – Innovative Public Policy for California” (2024).