MOORLACH UPDATE — Scary Departures — October 31, 2019

Leaving California

Yesterday, a friend shared the story of a recent road trip visiting several of the states with no personal income tax.   He and his wife had visited Park City, Utah, Jackson Hole, Wyoming and a few other places. I seem to have a conversation like this on a weekly basis.  It’s anecdotal, but it shows the scary story of the migration of many people who are leaving California. People are voting with their feet. The Daily Caller addresses this concern in the piece below.  So, let’s review a number of the frightening reasons.

This month, Joshua Rauh and Ryan J. Shyu authored a paper titled, “Behavioral Responses to State Income Taxation of High Earners:  Evidence from California.” Joshua Rauh is a Professor of Finance at the Stanford Graduate School of Business, a Senior Fellow at the Hoover Institution and a Research Associate at the National Bureau of Economic Research, for which he co-wrote the report.  He has also addressed Public Pension Liabilities, something that you know scares me,  for Prager University (see https://youtu.be/Vdmk-wCqDlE).  Ryan J. Shyu is affiliated with the Stanford Graduate School of Business.

What did they discover?

First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. 

Second, among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

The first observation is just a small crack in the dike, since an out-migration by less than 1 percent of the state’s top 1 percent is not alarming, but, it could be the start of a trend.

With the Federal Tax Cuts and Jobs Act of 2017, the ability to deduct state and local taxes (SALT) has literally become a Halloween trick.  Income tax rates may have been lowered, but limiting SALT deductions to $10,000 has an impact on the residents of states with high income tax rates.  Californians paying the top state personal income tax rate of 13.3% are probably paying a marginal tax rate closer to 23% just for this state, which is why one member in the 1 percent club was recently spooked out of California and moved to Florida (see MOORLACH UPDATE — Millionaires and Billionaires — July 17, 2018).

The Proposition 30 income tax increase in 2012 resulted in additional tax revenues being about half of what its proponents had anticipated.  Now that is a serious crack in the dike. How much more damage has Proposition 55 in 2016, extending the personal income tax increase, caused?  Tax increases are not static. Taxpayers change their behaviors. When Connecticut increased its tax rate on its 100 top taxpayers, their overall taxes decreased by 50% the next year (2016)!  While that is scary, it’s predictable.

The Yelp Economic Average released recently showed that national growth is up 0.07 percent.  Not bad, considering the bantering with China. However, California’s major cities are experiencing declines in strength.  Of the 50 Golden State cities Yelp covers, Bay Area metropolises like San Jose and San Francisco are eerily ranked 50th and 49th, respectively, while San Diego is in 46th place and Los Angeles is in 42nd.  The Capital City is in 34th place.

Other states see the cracks in California’s dike.  And why not? Can you imagine a state so focused on electrifying everything, expending incredible sums on renewable energy sources, when hydro and nuclear are available but excluded from the calculation formulas, and not taking the time to upgrade infrastructure to transport the electricity?  In the zeal to address climate change, California has created more greenhouse gases than it has reduced thanks to electrical lines being a causation of terrifying wildfires. That’s what Sacramento mandates that are not well thought out, combined with poor long-term planning, will do.

On blue states being mismanaged, if you’re not scared enough, check out MOORLACH UPDATE — California’s and Group 7’s Fiscal Health — September 30, 2019.  The bottom 10 states, on a per capita basis of their unrestricted net deficits, are blue states, with one exception, Kentucky.  Kentucky turned red the same night Donald Trump was elected President of the U.S., after 95 years of control by the Democratic Party.  Its Republican legislature has its work cut out for them in repairing Kentucky’s massive dike leaks.

Sen. Jeff Stone (R – Temecula)

Tomorrow will be Senator Jeff Stone’s last day in the California Senate.  He has been appointed to serve in the Trump Administration as the Western Regional Director for the United States Department of Labor.  Sen. Stone is my seatmate on the Senate Floor. He and I are about the same age and we are both products of the Anaheim Union High School District, attending two of its high schools at about the same time.  He was also a Riverside County Supervisor when I served as an Orange County Supervisor.

As a successful pharmacist, investor and community leader, he has made a significant impact in the city of Temecula, the county of Riverside and the state of California.  I will miss him greatly. I wish him all the best in his new challenges as he continues to serve his state and our nation.

25th Anniversary Look Back

Speaking of scary stories, the leaks in Orange County’s dike started to grow larger.  The November 2, 1994 edition of The Bond Buyer had this front page story:  “Orange County, Calif., Authority Weighs Reallocating Pool Funds,” by Brad Altman.

Mr. Citron’s biggest supporter during the campaign was Stan Oftelie, the CEO of the Orange County Transportation Authority (OCTA).  And why not? OCTA was the largest depositor in the Orange County Investment Pool. So, when the news about repositioning surfaced, it was a very big deal.

The two things that make the topic of this article spooky is the massive effort to emphasize reaching for a higher yield, versus assuring safety of principal and liquidity; and that exiting was probably the recommended and appropriate course of action.  But I’m sure that the CEO of OCTA took this recommendation off of the table due to his very public conflict of interest.

Here are a few selected paragraphs:

The Orange County Transportation Authority has asked its underwriting team to find ways to improve returns on the nearly $1 billion the authority has invested in the Orange County pooled investment fund.

The underwriting team, headed by Lehman Brothers, was chosen last week for a three-year contract, James Kenan, director of finance and administration for the authority, said Monday.

The immediate focus will be on boosting returns on the money in the county pooled investment fund, administered by the treasurer of Orange County.

“Because of some of the strategies in place, the yield [in the pooled investment fund] has been going down,” Kenan said.  “It is about 6.7%, but we have to look at whether or not it is in our best interest, working closely with the county treasurer’s office, to possibly take some of that money out of the county pool.”

Kenan said the underwriting team will be asked to discuss “some type of a diversification program [in which] we could get involved in some other investments that  might guarantee us something in the neighborhood of 7% to 7 1/2% over the next two or three years.”

Matthew R. Raabe, Orange County’s assistant treasurer, said yesterday that the county pooled investment fund contains $7.5 billion in assets and last month returned 6.75%.

Authority officials “are asking their financing team to identify what part of the fund might be more suitable for longer-term investments, as opposed to short-term investments,” Raabe said.  He said that his office would “work with them” to explore options.

The next day, with the General Election hours away, I FAXed this article to Donn Hallman, campaign manager for Huntington Beach City Councilman Jim Silva’s run for Orange County’s 2nd Supervisorial District.  Since Jim would be successful and seated in two months and I supported his candidacy, I needed to warn him of what was impending on the horizon.

Under the subject of “Pool’s Walls Are Starting to Crack,” I provided a simple picture.  If the Pool’s assets were $22 billion and the debt is $14 billion, then the equity should be $8 billion.  If the fair market value of those assets is down to $18 billion, then the equity is actually $4 billion. Consequently, OCTA should not get its investment back in full.

Here’s what I wrote:

OCTA should get back proportion share of fair market value (FMV), or “marking to market” at net asset value (NAV), or they get a generous premium at other investors’ expense.  Jim has got to understand this and get in front of the ball before it rolls over him and the County.

I also sent a FAX to Jim Silva.

Jim,

Best wishes for a successful campaign!

Attached are two articles I’ve written.  Please read, especially if you win.

Citron’s Pool is tenuous, at best, with a major crash imminent.  I hope the text I’ve written prepares you.

Yours,

John Moorlach

For the previous LOOK BACK, see MOORLACH UPDATE — Stronger Mental Health Resources — October 26, 2019.

OPINION

JACKSON: It’s No Surprise Republicans Are Leaving Liberals To Fester In High-Cost California

KERRY JACKSONPACIFIC RESEARCH INSTITUTE

https://dailycaller.com/2019/10/29/jackson-republicans-california/

It was a New York governor, not one in California, who said conservatives weren’t welcome in the state. But apparently conservatives out here are getting the message. A recent poll found that 46 percent of those who consider themselves “very conservative” have considered leaving California.

Overall, the “high cost of housing is most commonly cited reason for wanting to leave the state” at 71 percent. But the Berkeley IGS Poll also found that “high taxes” (58 percent) and the “state’s political culture” (46 percent) are reasons some are looking to flee.

Those results are largely driven by an unbalanced response. Break down the poll’s findings by political party and ideology, and the cracks really start to show.

For instance, 77 percent of Republicans say high taxes are reason to leave while only 36 percent of Democrats feel that way. Sixty percent of those in the “no party preference/other” category cited high taxes. For Republicans, high taxes are a greater reason, by 14 percentage points, to leave than steep housing costs.

More than three-fourths (76 percent) of those identified as “very conservative” said high taxes were the top reason to consider leaving, as did 76 percent in the “conservative” group. “Very liberal” and “somewhat liberal” logged in at 20 percent and 38 percent respectively.

Meanwhile, the split over the state’s political culture is an unbridgeable width-of-the-universe chasm: 85 percent of Republicans said it’s why they’re thinking about quitting, but only 11 percent Democrats listed it as motivation. The gap between the “very conservative” and the “very liberal” is even wider, 84 percent to 3 percent.

It’s not always been this way. Just six years ago, California Republicans and conservatives felt better about their state, with 29 percent of Republicans saying it was “one of the best places to live” and 31 percent of the “very conservative” holding the same opinion. This year, only 23 percent of Republicans and 19 percent of the “very conservative” believe that. Over that same period, both Democrats and the “very liberal” moved in the opposite direction, with more believing California is “one of the best places to live” in 2019 than 2013.

In addition to high taxes, what could possibly bother California Republicans and conservatives so much that they dream of fleeing? Why does state GOP Sen. John Moorlach of Orange County feel, anecdotally, “like I have someone new telling me that they are thinking about moving to another state on a weekly basis”?

The search for answers should start with the fact that California continues to move from being a civil society to a political society, in which government coercion is the organizing principle.

Think of how Sacramento and local governments have recently invaded private matters: bans on plastic bags, straws, and utensils, as well as natural gas; the road diet; proposals to strip consumers of the right to buy gasoline-powered automobiles; outrageous motor fuel taxes; and a determined campaign to install a single-payer health care regime.

California has a habit of addressing issues that aren’t problems. Banning plastic consumer items, forcing commuters into mass transit, and outlawing fossil fuels might make activists, lawmakers, and voters in the wealthy coastal enclaves feel good, but the intrusions are burdensome and frustrating for the rest.

Political capital and legislative resources are burned up solving superficial and imagined problems, leaving too few available to adequately deal with real issues, such as runaway public employee pensions, the housing and homeless crises, a hostility toward businesses, a middle-class exodus, declining public schools, and a creaky — and unnecessarily punitive — income tax system.

“When,” asks Moorlach, “will the Democrats begin to understand that they are mismanaging blue states, especially California?”

While elected Democrats, progressive activists, Silicon Valley executives, and Hollywood celebrities worship the concept of “diversity,” they reject diversity of political opinion. Would it hurt for them to occasionally show some respect for, and maybe even consider, ideas that don’t increase government’s role rather than summarily dismiss them as bigoted or sexist?

None of this means Republicans and conservatives are officially unwelcome in California. Though that might be some politicians’ objective, they can’t risk publicly alienating the middle.

But those who don’t run for office need not be so guarded. When tech media CEO Peter Leyden and Ruy Teixeira from the left-wing Center for American Progress wrote last year’s “The Great Lesson of California in America’s New Civil War,” they spoke for many on the left in calling for the establishment of a one-party political system in which dissenting thought is shut out.

No, it’s no mystery why Republicans and conservatives want to escape California. The reasons couldn’t be more obvious.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute, a nonprofit group advocating for limited government.

image18.png?w=660&h=165

This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

Also follow me on Facebook & Twitter @SenatorMoorlach