Let’s return to one of the hottest topics we have been covering over the past few years, coverage that has intensified recently: which major city or state government will get to bankruptcy court first? Our primary cities it he race to bankruptcy include New York City, Chicago, Los Angeles, San Francisco, and newcomer, Seattle. The state governments that we think are soon heading into bankruptcy include New York, New Jersey, Illinois, and California with Washington state a newcomer to the race.
Before reviewing the latest news and seeing which state or city is making the best progress towards government bankruptcy, let’s review how these cities and states got themselves into this financial death spiral position to begin with:
- A government entity keeps expanding its budget, eventually putting pressure on the tax revenue stream it receives.
- At some point, rather than cut government spending or make its programs more efficient financially, the politicians in charge raise taxes to meet the ever growing government expenditures.
- The raising of taxes causes some residents and businesses to leave the city or state for less tax burdensome areas, reducing the tax base and reducing the revenue stream.
- Rather than cut expenses and become more efficient to match the reduced tax revenue stream, politicians in the above cities or states raise the tax burden even more.
- This causes more residents and businesses to flee the city or state, further reducing the tax base and tax revenue stream.
- At some point politicians panic and raise taxes more and start cutting vital government services (e.g. police, fire, education) in order to try and balance government spending against the shrinking tax base and revenue stream.
- The reduction in quality of government services in particular and quality of life in general drives more residents and businesses out of the area.
- Eventually, the expenses, costs and financial liabilities outstrip the reduced tax stream and bankruptcy occurs.
1)The following statistics come from a tweet by the Rush Limbaugh News account so judge their accuracy accordingly. However, other data sources verify these general trends and realities. The format is positioned as a “scoreboard:”
Florida under Governor Ron Desantis:
- Lowest crime rate in the state in 50 years.
- #1 in state economic growth three years in a row.
- $10 billion in tax relief since 2019.
- Paid down 50% of existing state government debt.
- 3.7 million new businesses created.
- Working to eliminate or significantly reduce residential and business property taxes
- $145 billion in pension debt, highest in the country.
- $3.2 pending budget deficit in 2026.
- Budget deficit is predicted to grow to $5.2 billion by 2029.
- Oversaw $5.2 billion in fraudulent unemployment benefit payments.
- Ranked 50th out of 50 states for financial transparency.
- 7 straight years of illegal financial reporting delays
Note: The tweet did not mention that Florida does not have a state income tax while Illinois has a state income tax north of 4% and Florida does not have an estate tax while Illinois does, more reason why residents are fleeing Illinois.
2)Let’s head out to California and see how that state’s budget and fiscal woes are coming along:
- Governor Gavin Newsom recently bragged that the state government budget had been balanced and there was “zero structural deficit through July 2028."
- Sounds good but smart people looked at the state's economic situation and said things are not that rosy.
- According to Rachel Ehler of the state’s Legislative Analyst’s Office (LAO): “Despite these booming revenues, the state’s underlying fiscal condition, in our assessment, is not sound. We continue to have a structural deficit.”
- She claims that structural budget deficits still exist for the next two fiscal years.
- She went on: “Really, the only way the budget proposal before you is balanced is by relying on reserves.”
- In other words, the budget is balanced only because money had to be taken out of basically a rainy day fund, a fund that will deplete at some point in time.The real budget deficit could be as high as $16.9 billion according to the LAO.
- And these budget deficits are still around despite record revenue growth, i.e. state government expenses are growing faster than robust revenue growth.
- The California Budget and Policy Center chimed in with the opinion that structural budget deficits are still going to come true "without additional action.”
Also, as we have discussed, billionaires have already started to leave the state for more tax friendly states like Texas and Florida, states that not only do not have a state income tax but also have absolutely no plans to tax wealth. These fleeing California billionaires are not only taking the theoretical wealth tax revenue with them but are also taking any current taxes they are paying the state government, a double whammy to the state budget.
The National Taxpayers Union Foundation recently had some interesting, and distressing views, on the California wealth tax:
- The Foundation analysis noted that billionaires have already left the state in anticipation of a wealth tax including Larry Page, Sergey Brin, Peter Thiel, and David Sacks.
- It is estimated that fleeing billionaires have already taken $700 billion of wealth out of state and a hefty amount of now missing state income tax.
- The analysis estimated that before the exodus is down, a trillion may have left the state.
- But apparently the $100 billion upside wealth tax revenue was based on the number of billionaires and their wealth before the exodus began so the $100 billion estimate might already be way too high.
- The proposed wealth tax is currently expected to be retroactive, i.e. anyone living in the state as of January 1, 2026, would be subjected to the tax even if they moved before the tax was enacted into law.
- However, the Foundation points out that this maneuver is likely to be viewed as a violation of the Due Process tenet in the Constitution so that even if a billionaire leaves after the January 1, 2026 deadline the state of California probably has no way to go get them.
- The Foundation analysis pointed out that California, according to IRS data, lost a net 1.6 million residents over the past few years, taking about $12.7 billion of state and local tax revenue with them so the exodus is well underway and does not include just billionaires.
- As we have proposed, the state government of California is in a financial death spiral: the state politicians refuse to axe government programs or make them more efficient, they are raiding rainy day funds to balance the short term budget, and they do not understand that the state is losing residents and businesses because of higher and higher taxes and lower and lower quality of life.
- The Foundation's analysis summed up the feeble financial situation in the state quite nicely: “Seventeenth-century French finance minister Jean-Baptiste Colbert is supposed to have defined taxation as “the art of plucking the goose so as to obtain the greatest amount of feathers with the least amount of hissing.” Thus far, this proposed tax [wealth tax] is succeeding in maximizing only the hissing, with no feathers at all to show for it.”
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