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People are leaving the Golden State because it is over-taxed and over-regulated.

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Cut the Budget, Arnold

People are leaving the Golden State because it is over-taxed and over-regulated.

Could things get any worse for California’s economy?

State unemployment in June jumped to 11.6 percent — the highest rate on record, and among the top six nationally. Frantic negotiations between Governor Schwarzenegger and Sacramento lawmakers have yielded a deal to meet the government’s $26-billion budget shortfall, but as of this writing it is not certain that the required two-thirds of legislators will approve the threatened prisoner releases and accounting gimmicks. There will be no rescue from Washington, either, as pleas from state officials for federal bailout money have so far been met with the cold shoulder by the Obama administration.

Golden State officials claim that this mess is the inevitable result of the national recession. That’s partially true. But they’ll also find the other major culprit by looking in the mirror.

California’s repressive economic policies have been hampering growth for more than a decade. The state’s suffering goes well beyond the current cyclical downturn.

According to research conducted as part of the California Prosperity Project, California has ranked a mediocre 24th among all states in its ability to expand the economy and citizens’ incomes over the last five years. The state is in the bottom 20 nationally for private-sector employment growth, duration of unemployment, and average unemployment rate.

But surely things will turn around, right? After all, California is home to Silicon Valley and has a reputation for incubating new entrepreneurs like no other state.

Not so fast. Over the last five years, California has experienced an average net increase of small- and medium-sized businesses of just 1.2 percent. That puts California 16th among the states — not even in the top 30 percent.

Perhaps the best measure of a state’s economic health is its migration rate: individual citizens vote with their feet and move where they think prospects are brightest. Over the last five years, California has had the seventh-worst domestic migration rate; focusing on American residents, the state population has dropped by a million.

While this enormous exodus was occurring, nearby states were actually growing in population. Oregon and Washington together netted more than 260,000 new residents. The other Southwest states collectively gained nearly 1,000,000 new residents.

Why are people leaving? Because California is over-taxed and over-regulated. Businesses are having an increasingly difficult time surviving. And individual citizens are watching state bureaucrats take a bigger and bigger bite out of their incomes.

California’s corporate tax rate is the ninth-highest in the country. The personal income tax is the fifth-highest. The state sales tax is also one of the nation’s highest, and that doesn’t even take local sales taxes into account.

To dig the state out of this mess, state lawmakers must rethink the crippling policies of the past. California has some unparalleled economic advantages, including an incredible array and supply of natural resources, a strategic trade location, a hospitable climate, a highly skilled workforce, and a world-renowned university system.

California should be leading the nation — indeed, the world — in economic prosperity and enjoying all the benefits that such prosperity offers, like job opportunities, increasing incomes, and low unemployment.

Politicians would like to place all the blame for the state’s current distress on the national recession. But it’s Sacramento’s poor economic policies that have gotten us to where we are today. Fortunately, the situation is reversible. Better policies, geared to economic growth, will lead the Golden State to stronger performance.

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Written By

Jason Clemens is the director of research and Robert Murphy is a senior fellow at the San Francisco-based Pacific Research Institute (www.pacificresearch.org). They are both researchers at the California Prosperity Project, which released its first study this month.

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