Elon Musk made international news when he announced Monday that he’s pulling his businesses out of California. But perhaps more remarkable than Musk’s departure was his reason: Governor Gavin Newsom’s signature on a bill that strips parents of authority over their school-age kids, beginning with gender identity. The law goes into effect January 1.
“This is the final straw,” Musk said on X. “Because of this law and the many others that preceded it, attacking both families and companies, SpaceX will now move its HQ from Hawthorne, California, to Starbase, Texas.”
Musk’s complaints about California go well beyond this new, malignant law. Under Newsom, the state has logged a number of firsts and worsts: the nation’s worst unemployment rate, its highest business and marginal-income tax rates, and massive, growing and fatal government pension liabilities. Suffering the nation’s highest poverty and homeless rates, the highest costs of living, housing, electricity, insurance and gasoline, it’s also reeling from the nation’s worst-ever state budget deficit. Like the earthquakes with which all Californians are familiar, the financial aftershocks of this one will shake California budgets for years ahead.
That much is widely reported. But there’s another, nearly unreported indicator of California dysfunction. Thanks to Newsom’s refusal to repay a federal loan, California employers are now paying the highest federal payroll taxes in the nation – taxes that will rise each year.
But there’s worse news: because of the state’s underlying economic instability, a state auditor said it’s no longer possible to predict when the punishing federal taxes will end.
“Our earlier initial estimates suggested this process could take 10 years or more, but we no longer provide a formal forecast of the repayment date,” California’s principal fiscal and policy analyst Chas Alamo told me. “This is because the magnitude of uncertainty looking ahead is too great.”
The debt is a taxpayer form of Long Covid. Like half of all states, California went into 2020 with a well-funded unemployment insurance trust fund. As in those other states, all confronted by Covid, California’s unemployment account drained so quickly that the Trump administration stepped in to shore it up with a $20 billion loan.
But those states repaid their loans quickly. California and New York (along with the territory of the Virgin Islands) have not.
Newsom’s decision to stiff the federal government triggered a retroactive December 2023 increase in federal withholding for California employers in the state. That tax, described in the Federal Unemployment Tax Act, or FUTA, requires employers to pay 0.06 percent on an employee’s first $7,000 of pay. Newsom’s failure to repay the debt automatically raised the federal withholding to 0.09 percent. It will go up every year from there by 0.3 percentage points until the obligation is settled. And now, of course, with so much chaos in the system, even sharp-eyed state auditors can’t say when that will happen.
There are key differences in the California experience. Few other states’ political leaders are so mindful of race, ethnicity and gender as California’s, nor so ignorant of basic math and human nature. Ignoring years of warnings from its own auditors that the state’s unemployment system was vulnerable to hackers, Newsom labor secretary Julie Su worried more about access than security. When Covid hit, small-time fraudsters and international crime gangs swept about $30 billion from the state treasury. By the time Su finally closed the door on the theft, she stranded hundreds of thousands of legitimate claimants.
Newsom might have repaid the loan when he had the money. In 2022, he told anyone with ears that he had produced America’s largest state budget surplus. In fact, that surplus was generated by tax revenue on the spectacular, one-time performance of Silicon Valley IPOs during Covid, including Airbnb, DoorDash and Coinbase. Facing a recall for his bungling of the pandemic, Newsom decided it was more urgent to give that money away, including payments to 23 million Californians of up to $1,050 for a total of $9.5 billion.
For California’s small business owners, Newsom’s imprudence has worsened an already challenging environment.
“Any time you affect the labor cost, it drastically affects your bottom line,” says Bill Proestler, owner of two car-detailing centers halfway between Sacramento and San Francisco. His work includes long hours of manual labor punctuated by equally demanding office work. “I’m not complaining,” he says. “I love work. But I do mind getting my pocket picked by the state of California.”
Denise Duncan, who owns AT Industrial, a Pomona-based manufacturer, remembers vividly her reaction to receiving news of the payroll tax hike: “I wanted to throw up.” And it’s not just this tax hike. “Every time we adjust, we get smacked around for something else,” she says. “And now there’s” — she pauses, seeming to search for something she can say in front of small kids and old people — “there’s this.”
Mark Bucher, who owns Service First, a Santa Ana-based property-services company, ticks off the list of things for which he might have otherwise used the $5,640 he sent to cover for Newsom and Su — “bonuses, salary increases, a new piece of equipment. It’s a lot of money if it’s being stolen from you.”
While California employers battle an Ottoman empire of state regulatory agencies and the nation’s highest business taxes, Su has largely shed responsibility. Shortly after the catastrophe at the state unemployment office, Biden named her deputy secretary of the U.S. Department of Labor in 2021. The president promoted her to the top job at DOL following the departure of her boss Marty Walsh in early 2023. There, she tried to use her position to cover up her role in the scandal by offering California auditors the erase the debt from state financial documents.
For that reason and others, Su is on the hot seat in Congress – and still only “acting” Secretary of Labor. That’s owing largely to the efforts of California Republican House members.
In 2020, Rep. Kevin Kiley (R – Placer County) was still a member of the state Assembly, a ringside seat at the catastrophe unfolding in the unemployment office. Elected to the House in 2022, Kiley is widely credited with driving the Senate to block Su’s full approval.
“Su refused to accept responsibility for the staggering $32 billion unemployment fraud allowed on her watch,” Kiley said following Su’s underwhelming performance in a House hearing last summer. “Yet the independent state auditor, California Democratic lawmakers, and the law enforcement officials who uncovered the fraud have all blamed mismanagement at Su’s department.”
Kiley’s colleague, Rep. Michelle Steel (R – Orange County), is leading one of two congressional investigations (the other in the Senate) into the financial scandal.
“Julie Su and Gavin Newsom are responsible for billions in unemployment-insurance fraud and the punishing taxes small-business owners are paying as a result,” says Steel, who has grilled Su in recent House Education and the Workforce Committee hearings. “Even worse, Newsom continues to ignore the problem while Su actively covers up her misdeeds from an ivory tower in Washington. Su has failed to answer basic questions regarding her actions to sweep California’s massive federal debt — and her role in the fiasco — under the rug, and I will continue working on behalf of taxpayers to hold her accountable.”
Newsom is on the campaign trail for President Joe Biden, still eyeballing his own presidential prospects. But asserting Biden’s expertise in managing the American economy only illuminates his own shortcomings. So, among California’s other major exports – Hollywood movies, technology, and farm products – let’s now include irony.
Will Swaim is president of the California Policy Center and cohost with David Bahnsen of National Review’s Radio Free California podcast.
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