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California’s Brilliant Political Shake-Down Move

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. Chriss lives in Newport Beach, CA.

Support for Proposition 30, the income and sales tax increase touted by Governor Jerry Brown, has fallen below the critical 50% needed for passage for the first time in the California Field Poll.  With just five days to go before the election and polls showing support for Prop 30 fading, the teachers’ and other public employees’ unions are desperately spending fortunes trying to get voters to rescue their lifestyles.  Unfettered by the risk of the initiative failing, Governor Brown and state politicians have increased deficit spending this year by more than the $6 billion Prop 30 might bring in.  “Taxafornia” is already suffering from wealth and business flight as the third worst tax burden in the U.S, but California politicians love to tax like the French. 

California Teachers Association is independently spending a million dollars a day in advertising for passage of Prop 30 in the Los Angeles media market, on top of the $8.8 million they gave to the official Yes on Prop 30 campaign.  No one is surprised that the largest official contributor group supporting the initiative would be unions, but it is perplexing that the second largest contributor class is multi-national beverage companies.  Coca-Cola donated $1.9 million, PepsiCo furnished $1.5 million, Dr. Pepper-Snapple gave $.7 million and assorted other beverage folks chipped in $.6 million.  Undoubtedly, the sugary soda folks are in for some serious crony payback.

The No on Prop 30 is being led by the Howard Jarvis Taxpayer’s Association.  The largest contributor is the ever quixotic Charles Thomas Munger, Jr. who has given over $55 million.  Other large donators are The Americans for Responsible Leadership who gave $11 million and the Small Business Action Committee PAC who gave $9 million.

The Field Poll found that “Californians divide into two approximately equal size camps when asked whether they believe the state can continue to provide roughly the same level of services it now does if its budget had to be reduced by $6 billion. Statewide 48% think that it can, while 44% disagree.  Of those who foresee little impact on public services most are voting No on Prop. 30.”

In a brilliant political shake-down move, Governor Brown and the California Legislature passed a budget that would automatically cut 20 days out of the current school year if Prop 30 fails.  The Field Poll determined that “58% of voters are very concerned about the potential impact that the automatic spending cuts that would be imposed should Prop. 30 be defeated.  Among this group, support for Prop. 30 is running greater than three to one (68% to 20%).

The doomsday threat seems to have been effective motivating certain target groups:

  • Women support Prop 30 by a seventeen point advantage of 50% versus to 33%;
  • Independents supported the tax increase by eighteen percent at 52% to 34%;
  • Renters back the initiative by nearly two to one.

Men are split within the poll’s margin of error at 46% "Yes" and 43% "No".  Homeowners are also divided equally in their views of Prop. 30.  Geographic support is predominantly the Bay Area and Northern California versus Central and suburban Southern California.    

Historically, about 5% of people interviewed in a telephone poll falsely indicate their support for government and taxes, which means the “real poll numbers are 43% “For” and 38% “Against”.  Voters who are undecided on tax initiatives by Election Day tend to be people who have not been persuaded by the dog and pony show in support of picking their pocket.  Consequently, it appears Prop 30 is headed for a close defeat. 

California politicians are desperate to avoid the reality that the state is deeply insolvent and becoming more so every day.  In the first three months of the budget year through September, California budget is already upside down by $1.2 billion and the state had to increase barrowing by $2 billion to an obscene $22 billion to just keep the lights on.  If you multiply the first quarter shortfall by four, it is obvious that the $6 billion Prop 30 tax increase will only go to paying for the current deficit and do nothing to improve schools. 

With credit rating agencies threatening a downgrade California’s debt to “junk bond” and a slew of cities headed for bankruptcy court, passage of Proposition 30 tax increases will accelerate the persistent state budget deficits caused by the flood of the wealthy and small businesses abandoning California for the low tax rates of Texas and Nevada.  Mayor Bloomberg of New York summed up what happens when the wealthy are walloped by government: “You saw in France people moving out when they raised the tax rates,” ” the mayor said. “Whether you like it or not, the wealthy are mobile.”

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Also by Chriss Street: Atwater, CA, a town with 28,000 residents, did not have the cash flow to make a $2 million municipal bond payment due in November and may have to file for Chapter 9 bankruptcy. The 4th in a soon-to-be tidal wave of local government failures.....  Atwater, Next In A Tidal Wave Of California Municipal Bankruptcies 

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