The Secret But Real Story of California. Part Two

Victor Davis Hanson

Why is California so dysfunctional?

It is not from want of state treasury money.

Its highest tax bracket in the nation is 13.3 percent. It relies on only about 1 percent of the state’s households to pay nearly 50 percent of all state income tax revenue.

But then again, California has more billionaires and rich zip codes than any other state. Its coastal corridor from La Jolla to Berkeley has the highest assessed aggregate property in the nation.

But what is hollowing out the state are the millions, perhaps over ten million in aggregate over the last half-century, who have fled the state.

Most were the conservative voters who ensured Reagan, Deukmejian, Wilson, and Schwarzenegger were governors for over three decades. The exodus was replaced by mostly an influx of impoverished illegal aliens and upscale leftwing techies, as Silicon Valley’s corporations—e.g., Apple, Facebook, Google, Twitter, Nvidia, etc.—became valued at over $10 trillion in market capitalization.

To understand California, just remember the top of the pyramid is the richest enclave in the nation, and the base is the poorest, with dwindling numbers in between.

The top often pays at the capital gains rate or finds tax loopholes. The bottom receives state money rather than pays out to Sacramento. And the middle gets little from California but pays much for others to get a lot.

So, California has become a pyramidal, medieval world by 2025 of the very affluent retired and professional classes on the coast, and a vast population of poor people, mostly residing in the interiors, with a hollowed-out middle class that could not afford the highest energy, housing, and insurance costs—and taxes—in the nation.

But there is also a subterranean California, an off-the-books California that Newsom and others never mention.

To survive, the poor and the vestigial lower middle classes live off the books, through cash-only commerce. The underground economy is estimated to be as high as $150 billion. I assume it is much higher.

Here in the Central Valley, vast weekend markets/swap meets, etc. deal mostly in cash. You can buy anything from furniture to food to major appliances, often without sales taxes and with no questions asked.

From my farm to town there must be 10 “canteens,” mobile cookeries, mostly selling Mexican food, to hundreds each day, and mostly unregulated and working through cash sales.

To find an electrician, a plumber, or a handyman in California is to meet a demand for cash-only wages.

I could go on. But millions of Californians, and most of its “undocumented,” are paid in cash and buy in cash, as part of a huge untaxed economy that makes the statistically poor not necessarily as officially poor as we think. This is especially true, given generous entitlements that accrue to millions, who on the books are poor and eligible for state and federal subsidies, but off the books, and with tax-free income, may be solidly middle class.

Since January 1, 2024, all illegal aliens have been eligible for free medical services under Medi-Cal (California’s Medicaid program).

That 2024 date only officially recognized what had been de facto true for years—namely that illegal aliens were rarely ever denied health care at ERs and yet rarely were counted as recipients of state aid. Finally, the ruse was transparent in 2024 when Newsom simply signed a bill making it legal for illegals to receive state health care. And by 2024–25, the cost to the federal government to subsidize California’s Medi-Cal bill was well over $100 billion.