Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

New Wealth Tax Spurs Infrastructure Spending - See Railroad Stocks

|Includes: AA, California Republic Bancorp (CRPB), GSI

Updated March 11, 2013

With the passage of Proposition 30 in November, California seems to be on the rebound. That's not to say that the 9th biggest economy in the world (at approx. $2 trillion GDP) has returned to its pre-recession glory. However, the current California administration, led by Governor Jerry Brown has begun to make serious reforms that will work to return the state to its 7.8% unemployment rate. The current preliminary rate as of January 2012 still stands at 9.8%, unchanged over the last three months.

So what is expected to be driving this economic recovery mode?

As of the numbers released in September 2012, California has recovered about a half million jobs, offsetting the 1.4 million lost between July 2007 and February 2010 according to the California Legislative Analyst's Office. But the return in private sector employment numbers are not coming from where you might expect. In fact, since 2009, construction and manufacturing, a primary driver of California labor, has remained flat, with barely any increases, suggesting a serious lack of momentum for infrastructural development. Instead, the largest sectors moving higher today in the golden state are through business services as well as leisure and hospitality.

Driven by the tech boom, California's state officials are looking to diversify their rather radical growth patterns, and they've taken a very bold stance to do just that.

In the Bay Area in January, the Federal Railroad Administration authorized the beginning of construction for California's first High Speed Rail (HSR) System. The project, with a total budget of $68 billion is expected to begin formal construction in the Central Valley as soon as April, and will eventually connect the North Bay to the Los Angeles area.

The project, which expects to produce The initial leg of the project, stretching 130 miles south will face serious scrutiny said Chief Executive Officer of (CHSRA) California High-Speed Rail Authority's Jeff Morales, but his confidence at a press conference in December indicated a positive outlook on the projects future.

"This is now a statewide rail modernization plan that will not only deliver high-speed rail transportation, but also will invest billions of dollars of improvements to local and regional rail systems around the state immediately," said Morales in a December press conference. As of January 12th, only $12.3 billion in funding has been formally identified for the project.

Estimated by CHSRA in the formal 2012 business plan "Construction of the rail is expected to generate up to 100,000 construction-related jobs every year the system is under construction, and as many as 450,000 permanent jobs once the rail is completed," noted the proposal.

If those 450K were added today, the current unemployment level would drop from 9.8% to 9.1%.

Funding Hurdles

Granted approval by the Federal Railroad Administration, the project will look to borrow a $3.2 billion dollar loan from the Federal Reserve Development Fund. These initial loans will cover some of the costs to buy out local farmers who's land the rail will pass through, but it will do little to cover the expenses of the entire project.

To create further funding, Prop 30, proposed by the Governor's Office and passing with a 60.1% margin, is aimed directly at raising tax rates on the high income individuals and multi-state businesses to close existing loopholes. The additional revenue stream by the PIT (Personal Income Tax) and the CGT (Capital Gain Tax) will in provide much needed liquidity for the state's General Fund ($18.6 billion for 2010-2011) which many help pay for the HSR.

"The thing is, there is barely enough money to go around as it is," said Sheila Kuehl, the Director of the Public Policy Institute at Santa Monica College and the author of the weekly CPR (California Progress Report). "I've been working with state legislature since the early 2000's and we've always been on a windy road about the budget," said Kuehl. "The recession hit California hard, and we've haven't come back from that, so I don't see how Jerry [Brown] expects a rail system to be built by 2018 or '19."

In total, Proposition 30 will raise $6 billion annually according to the Department of Finance, and while it seems to be a significant number for the state, a lot of the money will go towards reforming an underfunded educational system, not paying for the HSR system.

Said Kuehl, "It just comes down to knowing the place well enough to know that they're not going to spend the first rounds of taxpayer money on a whim like the HSR. The idea is sound, there is a need for modernizing transportation, but the timing is wrong."

To help cope with the lack of funds the HSR Authority will also issue $2.6 billion in bonds to investors to raise capital for the first section of the rail.

Even so, the project's total budget remain somewhat of a mystery to many Californians. Lawsuits with farmers continue to pile up amidst property purchases, but over the next two months the land acquisitions will be theoretically finalized and construction will begin.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: All Steel Sectors should watch for structured agreements by the High Speed Rail Authority with select Steel Corps to develop the tracks. Will quantify long-term position.