The tarnish on the Golden State By Steven Greenhut Senior editorial writer and columnist for the Register Perhaps the eternally warm weather, the rugged coastline and the luscious mountain views are warping the minds of people who ought to know better. The state's budget deficit is $34 billion-plus, electricity and workers' compensation costs are skyrocketing, and a spate of anti-business legislation is about to go into effect. Yet the electorate remains in La-La Land, apparently unaware of what the crisis will mean for its lives and pocketbooks. Even Republicans believe that, one day soon, voters will wake up and elect sensible leaders to positions of authority. I hope the optimists are right, but count me as skeptical. California is facing the same crisis faced by every socialist country. The basic system - punish the rich, lavish benefits on the politically powerful and centralize power in the hands of the most craven politicians - cannot go on forever. At some point, those with the money who create the jobs and pay for this whole racket leave for better climes, which explains why East Germany built a wall to keep people from going. By contrast, California is what one friend calls a golden prison. Our freedoms are eroding, the quality of life is disintegrating and the state takes an increasing bite out of our earnings. But, what the heck, it's December and the temperature is in the 60s. So most of us stay. But even nice weather has its limits, as the state learned in the 1990s when nearly 2 million more people fled the state than moved here from other states in the face of an economic downturn. (That didn't stop people from coming from other countries, given that a tanking California economy is still better than rural Mexico on a good day, but that's another story.) Before you chalk this up to the rantings of a "glass half-empty" libertarian, I'd suggest paying attention to the views of someone who really knows the economic situation. Democrat Kathleen Connell, the outgoing state controller, in a recent interview spelled out a scenario that's not much different from what I'm saying. "It all goes back to government agencies that have grown 47 percent," she said. "The question is why. How is that possible over eight years? It's a stunning factor. ... The government chooses to just grow. The result is this immense budget crisis." The Davis administration, of course, has spent money like a maniac, but the problem started under the Pete Wilson administration. Noting that her department grew at 0 percent during her eight years in office while state government grew at 47 percent, Connell said government spending simply needs to be restrained, and that zero-based budgeting must be adopted. "On the revenue side we must be very cautious," she said. Connell fears the proposal by many Democratic legislators to increase income taxes on the wealthy. Already 62 percent of the taxes are paid by 5 percent of the people, and these high payers use few services. "You will have leakage. These people will leave. ... It's killing the golden goose." California is a dynamic, entrepreneurial economy, and dramatic increases in income taxes on those high net worth individuals who drive the economy will cause the situation to spiral. Already, she is witnessing increases in businesses incorporating in neighboring states, and talk of leaving has replaced talk of home values at social events among the high-income people the state depends upon to keep its operations going. The crisis is so severe that it won't go away anytime soon, she said. "It's not a one year or two year sequence and then the forests will bloom." As Connell sees it, the enormous capital-gains revenues that California recently depended upon so heavily will not rebound ... ever. Changes in federal rules for stock option plans will change the nature of compensation in Silicon Valley, and that will reduce state tax revenues. Furthermore, the older, high net-worth population is retiring or leaving, and is being replaced by lower net-worth people who pay little if any state income taxes. Things will only get worse. Furthermore, even as California politicians have engaged in a massive spending spree, California voters have approved an excessive amount of debt spending. California, she said, has become over-leveraged, which means that less money will be available to pay for the real infrastructure needs faced by the state. Rather than invest in important infrastructure, the Davis administration spent the windfall on salary hikes for prison guards and other unions, and on locked-in state spending that will not benefit most Californians. This is so, despite the state's crumbling infrastructure that has not kept up with dramatic population growth. Connell sees an increased reliance on pay for services. People are going to have to pay fees they are not used to paying. They are going to have to get used to worsening traffic, increasing utility costs and poorer government services. "We're failing to provide the skeletal services." She thinks voters are in denial and won't wake up until they start paying vastly more for significantly less. They will, she believes, at some point hear the giant thud and wake from their stupor. I certainly hope so. California already has the most stringent environmental rules in the country, which impacts business creation and expansion, and makes home prices the highest in the nation. Recent anti-business actions - paid family leave, increased worker's compensation costs, Gov. Davis' bungled energy contracts which are leading to higher electricity costs - "are all signposts to companies that it's a more difficult journey here in California." She advocates cutting government, and increasing tax revenue with a sales tax on services, as a means to spread the tax bill out over more people. I don't favor any new taxes, but she's right that socking it to the rich will only backfire. Here's another problem: Voters replaced Connell, an unabashed defender of the taxpayer and fiscal truth teller, with Steve Westly, a liberal activist with no real financial background, and a desire to use his post to increase government spending. As Connell puts its, getting "lucky" in a stock sale is no background for the controller's office. Connell was an independent fiscal voice who stood up to the governor over the costly energy contracts he signed at the height of the electricity crisis, and insisted - correctly, as we now learn - that the governor's budget was not balanced. I'm not sure if I'm more upset about the budget crisis caused by government officials who spent other people's money with wild abandon, or that no one will be there to demand a full accounting as the scandal unfolds. My best advice: Keep on the look- out for a good job in Arizona.