California: Higher taxes and surging

Turns out that California since 2010 has contributed 20 percent of the country’s GDP growth with 12 percent of the country’s population. As we explored previously this growth occurred primarily after California passed a major tax increase in 2012. And was written off as in permanent decline by many during the Great Recession. Conventional wisdom had it that high taxes, not friendly to business, a structural budget deficit, paralyzed politics, etc. had ended California’s golden age. Think again!

California is sixth in per capita income. By contrast Michigan––which has relied on cutting taxes––is 30th. California’s per capita income is 14 percent above the national average, Michigan’s is 10 percent below. The difference is more than $12,000 per person.

And no Michigan is not growing faster than California. California’s per capita income in 2010 was eight percent above the national average which gives it a growth of six percentage points since 2010. Michigan in 2010 was 13 percent below the national average giving it a three percentage point gain since 2010.

When you dig deeper into the per capita income data the contrast becomes even greater. The component of per capita income that state policy is designed to raise is employment earnings––wages and employer paid benefits––per capita. California’s employment earnings per capita are a little more than $36,000 compared to a little less than $27,000 in Michigan. California’s employment earnings per capita are 16 percent above the national average, Michigan’s are 13 percent below.

In California, employment earnings are 64 percent; dividends, interest and rent are 21 percent; and government transfer payments are 15 percent of per capita income. In Michigan employment earnings are 61 percent; dividends interest and rent are 17 percent; and government transfer payments are 21 percent of per capita income.

(The state per capita income data comes form the Bureau of Economic Analysis and can be found here.)

In my 2009 post rebutting the notion that California was in permanent decline I wrote:

The central important defining characteristic of California is their future orientation. No matter how screwed up their politics, its a state which, at its core, is at about creating the future, not protecting the past. What matters most is the talent and entrepreneurialism of the people of California. To the degree that policy matters what matters most is their embracing more than resisting globalization and technology. More free trade oriented, more open to immigrants, at the leading edge of green policies, stem cells and now transportation alternatives to the car.

Being a place that is aligned with the mega forces that are globalization and technology and a place that is focused on creating what is next rather than trying to regain what once was makes California prosperous today and highly likely to be prosperous tomorrow. Being welcoming to all and being willing to pay for––with higher taxes––public investments in a 21st Century infrastructure and human capital development just adds to their current and future competitive advantage.

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