Over the past few posts we have made the case that New York City is in the lead to be the next major U.S. city to go bankrupt. The new mayor, Zohran Mamdani, is already in budget problems and budget shortfalls, making his campaign promises look moot since he does not have enough money to pay for those promises. In fact, he does not have enough tax revenue to pay for basic city services, being over $5 billion short relative to the next fiscal year budget.
But today let’s see how other prime candidates for government bankruptcy are doing in their financial death spiral. As you may know, our top state candidates to go bankrupt include New York, New Jersey, Illinois, and California. Our top city government candidates to go bankrupt include New York City, Chicago, Los Amglees, and San Francisco (although a couple of west coast cities are making late moves in this bankruptcy race, Portland and Seattle).
But before reviewing the financial status of the above government entities, let’s review how the financial death spiral and eventual bankruptcy will unfold:
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)Let’s start this update with the situation out in California:
We have already reviewed numerous times how residents and businesses are fleeing the state due to high tax burdens, high utility costs, high gas costs, high crime rates, high business regulation burdens, etc.
Businesses that have moved their operations in total or in part out of California include Tesla, Schwab, Toyota, and other small and large businesses.
Residents have also been fleeing, creating a smaller tax base and smaller tax revenue stream for the state government.
Rather than reduce taxes and/or make state government operations more efficient to match the outflow of taxable assets, there is a movement to impose a so-called “wealth tax” on the wealthiest Californians, not an income tax but a wealth tax on the total assets of individuals, not their income.
Billionaire founders of Google, Facebook, and Paypal have already moved their operations and lives to Florida to avoid both the current high tax burden of California and obviously not wanting any part of the wealth tax.
But it is not just high tech founders moving out of the state with news reports indicating that Hollywood stalwart, Steven Spielberg, has already moved out of California, relocating to Manhattan in NYC.
Whether he moved out of California to avoid the wealth tax or it is to stay closer to family, his explanation for the move, it is another very rich California who will be trying to avoid the wealth tax if it ever becomes a reality.
Whatever the motivation was for Spielberg’s move, in any case California will not be getting his current state tax revenue going forward, never mind getting his wealth tax bite. Raise taxes enough and those that can most easily afford to move out from under the tax burden will do just that: move elsewhere and take their tax stream with them.
2)One state we have not discussed that is on the path to bankruptcy is the state of Virginia. However, recent actions by the state’s politicians open up the possibility that they will also start down the path to bankruptcy:
One of the first things the state politicians did in the state legislature in January was to impose a slew of new taxes on a large variety of products and services.
In a stunning move of hypocrisy, right after politicians imposed a whole host of taxes on every state resident and business, a member of the legislature is proposing that the salary for members of the legislation get tripled.
So it appears that the state political class has no problem significantly increasing the taxation of its residents and businesses while rewarding themselves for no good reason.
And as we have discussed in a recent post, while the states around Virginia have been working at reducing or eliminating their own state income tax programs, giving their residents back some of their earning power, that does not appear to be in the genetic makeup of current Virginian politicians.
And to compound this driving up of the tax burden on state residents, a major company has already announced that it is moving a significant Virginia business presence and tax stream out of state:
In a possible leading indicator of business out migration, Boeing has announced it will move its Defense, Space, and Security headquarters out of its current home in Alexandria, Virginia.
It will move this division’s entire operations to St. Louis, Missouri.
This will take almost 400 highly paid, and highly taxed, employees out of the state to the benefit of Missouri.
When the transfer to MIssouri was announced, Boeing also announced major investments in that area of their business, a major investment that will not happen inVirginia.
While Virginia is not in imminent danger of going bankrupt, these latest developments from the state’s political class are early leading indicators of behavior that drive the out-migration of residents and businesses as the state government increases the tax burden on their tax base.
3)A brief diversion back to New York City’s race to bankruptcy court. The city currently cannot fulfill its current government responsibilities, given it could not remove snow and garbage during a recent snow storm and it could not prevent about 20 individuals from freezing during that storm. Given a $5.4 billion budget deficit for the next fiscal year, Mamadani will have difficulty implementing all of his free promises he made during the campaign: free buses, free daycare, free college tuition, etc.
And yet he has devoted millions upon millions of dollars towards government equity programs in his budget, programs that will do absolutely nothing for the benefit of city residents. And according to Joe Rogan, not only does Mamadani want to waste millions of dollars on stupid gender, race, and sexual DEI programs, he also wants to spend a whopping $1.2 billion on illegal immigrant care.
Garbage and snow does not get removed. People are freezing on city streets. The budget will likely require cuts to essential city services. And he wants to spend over a billion dollars on people that should not even be here in the country in the first place.
As city residents and businesses see their tax dollars going to waste like this while city services stink, more and more will decide to head out of the city for more sane, less burdensome taxation areas, making the current $5.4 billion budget deficit look good against future rising deficits.
4)One of our favorite state governments to go bankrupt includes the state of Illinois. The state government has unfunded liabilities extending far into the future at the same time that residents and businesses are fleeing both the state and its largest city, Chicago.
And as always rather than rein in spending to be in line with the state government’s shrinking tax base or make government operations more efficient, the latest budget proposal from the state’s governor calls for increased taxes:
Illinois Governor J.B. Pritzker’s proposed budget calls for the highest level of state government spending ever.
He needs to close an expected $2.2 billion budget shortfall and thus, as always, he calls for tax increases of over $700 million.
He wants a wacky “social media tax” on large social media platforms, an idea that likely cannot even be implemented.
His tax increase proposals require increased taxes on both businesses and residents.
He wants to keep more state money for the state government and deprive local governments of their typical share of state tax money, an action that will likely result in local government tax increases to make up for the $60 million shortfall.
More taxes, more taxes, more taxes. Do these people never learn? The state has been bleeding businesses, residents, and tax base for years and they still do not understand: when government services get worse and worse, when taxes and business regulations get more and more burdensome, people will look for opportunities to move to other places where they have more freedom to keep their hard earned wealth.
That will do it for today: politicians in these financial death spiral cities and states do not get it: you cannot keep rising taxes on residents and businesses without seeing those same residents and businesses eventually getting fed up with the process and taking their tax revenue streams elsewhere. It is basic human nature.
Coming attraction: while our current position is that New York City will be the next major city to go bankrupt, our next post, based on some in-depth statistical and financial analysis, makes a strong case that Chicago will win that race to bankruptcy court. It is still our contention that Illinois will be the first state government to go bankrupt, holding off California (just barely), New York and New Jersey.
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If you agree that we need to deseat every member of Congress for their lack of success and accomplishment, then please consider going to the following petition link to help the cause:
https://www.change.org/p/deseat-congress-reset-freedom
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