Earlier today, Governor Arnold Schwarzenegger declared California to be in a fiscal crisis—not a surprise for a state inflicted with arguably the most burdensome tax regime in the country, and among the costliest systems of social welfare.

Despite example after example, we can't seem to figure out that government excess and a culture of entitlement ultimately leads to ruin.  We've seen it for decades in Europe, and we see it in many states across the U.S.  The high correlation of tax rates and disproportionate spending with suboptimal financial performance is no coincidence.  The R squared must be approaching 1.

It's illustrative to compare California with another state of similar demography, Texas.  Although both are heavily populated (numbers 1 and 2), and each has a mix of high technology, life sciences, industrial, and agricultural interests, the similarities quickly begin to fade thereafter.

In 2006, California was ranked 8th in revenue per capita, thanks largely to the highest state income tax rates in the country, capping out at 10.3%.  By comparison, Texas ranked 48th, largely a byproduct of its 0% income tax rate.

Exorbitant tax rates might not be so problematic if they weren't a springboard to out of control spending.  In 2006, California ranked 4th in expenditures per capita, whereas Texas ranked 42nd.  California actually spent roughly $8,000 more per household than Texas, an additional 80%.  Does anybody believe California is getting a return reflective of that disparity?

Notwithstanding Texas' low spending rate, its economy is among the most vibrant and resilient of all the states.  Unemployment in Texas (5.6%) is significantly lower than the national average; while California is hamstrung with an 8.2% rate, third worst in the country.  California was one of the first states to slip into recession; Texas was one of the last.  California is hemorrhaging businesses who can no longer cope with its deadly duo of suffocating taxes and overregulation; whereas Texas is an attractive location for new business formation and expansion of existing businesses.

The California/Texas comparison is not an anomaly, there are numerous others.  It is astonishing how frequently policy makers ignore compelling data and a simple, winning formula in favor of decisions that entrench their power and make us more dependent.

Reasonably limited government and personal responsibility is the best prescription for sustainable fiscal viability.  California is learning that the hard way.