California

America in Danger If California Goes Off 'Fiscal Cliff'

The biggest economy in the U.S. is turning around, which could mean good news for the overall national economy.

CNBC,

21 December, 2012

"About half all the new jobs created in the United States in the last year were in California," says Bill Lockyer, California's Treasurer.

The unemployment rate in the Golden State is still well above the national average — 10.1% compared to 7.7% — but it's far below the state's 11.5% rate a year ago.

In other good news, the state reduced its $30 billion deficit to just under $2 billion.

"We're actually getting the structural deficit resolved," says Lockyer. "We're seeing in the not-too-distant future long-term balanced budgets."

Helping California reduce its deficit is a tax increase that voters approved on Election Day. Prop 30 — as it's known — raises the statewide sales tax by a quarter of a penny and increases income taxes for individuals earning more than $250,000 (over $500,000 for couples). The new tax revenues are expected to raise an additional $6 billion that the state will use for educational funding.

Lockyer says the $6 billion tax increase won't have a substantial impact on the state's $2 trillion economy but it will save jobs, primarily in education.

"We've disinvested in the country and in California particularly in higher education in the last several years. It's an unwise policy," says Lockyer. "We need to begin to rebuild that educational infrastructure."

Lockyer says voters recognized that "it's not right to cut education. Too much of our future depends on it."

Although California has led the country in various initiatives including limiting taxation with Proposition 13 in the 1970s and fuel efficiency standards decades later, Lockyer doesn't expect Calfornia's Prop 30 to encourage other states to do the same.

What other states and California do have in common, says Lockyer, is the potential impact of spending cuts and tax increases that will take effect if Congress and the president can't agree on a plan to avoid the so-called fiscal cliff.

"About 40% of sequestration impacts are all on state and local government programs," says Lockyer referring to the automatic spending cuts. "There's also the impact on taxpayers if unemployment insurance is suspended, if payroll taxes aren't cut or tax rates go up….and the unclear possible result of changes in healthcare funding."

Stephen S. Fuller, a George Mason University professor, projects that California could lose 135,209 jobs as a result of Department of Defense cuts and an additional 90,255 cuts in non-defense jobs. Thousands more could lose benefits if emergency unemployment benefits aren't extended. Lockyer says he's "very concerned" about the the impact of the fiscal cliff.