I agree with most of what Stan and Pete have already posted. Paul Krugman nicely pointed out the obvious: " ... California has immense human and financial resources. It should not be in fiscal crisis ..." California's current predicament has been caused by its self-imposed political dysfunction.
There are plenty of resources in California to tax to pay for the state's budget. If the California legislature is unable to raise the needed revenue or cut the excess spending beyond the revenue it can raise, then the governor may have to go hat in hand to Washington. What should he find when he gets there? A firm response that a precondition for any special assistance in the short term is a set of fiscal changes that ensure that there will be more than enough money in the state's general fund to pay back the money, at a high rate of interest, over the long term.
It has been my view since the beginning of the bailout frenzy over a year ago that if the federal government is going to get involved, it ought to do so as a vulture investor. A vulture could eat well in California.
Speaking as an expert
Or, at least as someone who has actually tried to do business with the state of California; the state NEEDS to reorganize in bankruptcy. It's their only hope.
The state is a prisoner of the unions in ways that wouldn't surprise Tulloch and Buchannan. The state's taxpayers can't afford the deals the well-focused special interests have negotiated for themselves.
Ditto for the municipalities within that state. Policemen and firemen retiring at age 50, on pensions of often over $100k, with full benefits, isn't sustainable.
Political Dysfunction
Is "political dysfunction" another way of saying democracy doesn't always work? You seem to be saying that Californians haven't been taxing themselves enough. Compared to whom?
Only Themselves
Californians are not planning to tax themselves enough compared to how much Californians want to spend in the upcoming fiscal year. That is the only comparison that matters for the purpose of putting together a budget. The California incarnation of democracy does not seem to have "worked" well enough to produce a budget in an orderly way.
Not as much as they want to spend...and distributed weirdly
This seems exactly right: California voters have been willing to demand expensive remedies for 'problems', while generally rejecting the taxes that would pay for the remedies. They've also seen fit to dictate to the Legislature how to distribute spending, without paying much attention to the fact that their demands take up to much of the available funds, leaving persistent shortfalls for less glamorous but important spending.
Policemen and prison guards retire at 50 with large pensions, while per-student funding at the state's university system dropped 40% between 2000 and 2008...before the hundreds of millions of cuts that are coming now.
Behind this lurks the Prop. 13 monster, which ensures an insanely unequal treatment of property taxes depending largely on when a person -- or corporation! -- purchased property.
More taxes, bigger deficits.
California as of 2007 was tied for having the second highest state-and-local taxes in the nation as a percentage of its residents' income, equal with New Jersey, after only New York.
Interestingly, going into this year, 2009, those three highest-tax states, New York, New Jersey, and California, faced $65 billion in budget deficits -- more than two-thirds of the budget gaps faced by all 50 states.
Coincidence? I take this as being factually quite inconsistent with the Krugman's "If only people would pay more taxes, budgets would be fine" model.
It seems to me a lot more consistent with the Milton Friedman-public choice economics model of budget crises: Interest groups capture the political spending allocation process and allocate funds to themselves profligately. Taxes shoot up to pay for it, but can’t stay even, as the more tax collected the more the groups spend. In the end, spending is constrained only by the size of the deficit and/or a fiscal crisis.
Remedy: I'm with you, a federal vulture fund that will pick California's bones clean as the cost of a bailout -- and teach 'em that every time an interest group wants a spending bill or proposition, it, that group, has to propose the tax to pay the full cost for it (on an actuarially sound basis, if the spending goes into the future) at that same time.
No tax, no spending.
Then when the federal government hits the same wall 20 years from now, it will have a model to follow.
Real story on CA taxes
The tax figures you cite (on CA being tied for 2nd highest state & local taxes in the nation) are misleading. Prop 13 from 1978 is still in force for a lot of long time residents, meaning someone in LA with a house valued at 450,000 pays around $700 a year in property taxes!! Sure, newer residents pay more, but there are a lot of long time residents who don't pay reasonable tax rates, and still want services, etc. It's unsustainable. Proposition 13 is a microcosm of what's wrong with CA's fiscal situation.
Not just homeowners
Much corporate-owned property in California hasn't changed hands since the 1970s, and also enjoys a huge property tax subsidy.
By the way, your LA example is too modest. I inherited my father's house, which he had owned since built in the 1960s. At the peak of the bubble, it was worth well over $1m (outside LA, at that), and my annual taxes were $760. (Now, of course, it's worth less!)
Meanwhile, people who bought during the bubble are triply shafted: they overpaid, they are entangled in disadvantageous mortgage products, and even if their property taxes decrease as their property value plummets, they're not protected from increases until the value catches up to the formula: purchase price+1%/year.
So: your tax rate in California depends largely on whether you own property, and if so, when you bought it. (Presumably, market pressures keep the share of property tax in rental costs pretty close to the average property tax burden).
Andrew & Jim, Re: Jim's
Andrew & Jim,
Re: Jim's contention of "More taxes, bigger deficits", and the implication of causality in that direction, some contend (with regard to the federal budget) that every dollar of incremental tax revenue will cause a dollar (or more) of incremental spending rather than result in smaller deficits, ceteris paribus. Although I consider it quite plausible that incremental revenues will cause some incremental spending, I am skeptical of assertion that we can reliably assume that this incremental spending will be equal to (or greater than) the amount of incremental revenue.
In academic literature analyzing this question it is referred to as the "tax-spend hypothesis" or the "revenue-expenditure nexus" (although it may be that references to "support of the tax-spend hypothesis" refer only to some incremental spending rather than to incremental spending equal or greater than the amount of incremental revenue). I've dug up several papers on this question, and so far I don't see a clear, consensus answer.
I would appreciate any argument you can offer one way or another on this question, as well as any related links to analyses, data, etc.