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So California is close to being the first failed state despite high taxes on luxury items.

Let me guess, CA has low taxes on property, so they have to tax everything else?

Bingo. Prop 13: http://en.wikipedia.org/wiki/California_Proposition_13_%2819...

The alternative to Prop 13 is that people who lived their whole lives in CA can't afford the taxes to retire there.

This is an interesting line of thought, but you'd be better off if you followed it to its conclusion.

Assuming the same level of property taxes, others must pay more, making the state unattractive long-term. Does this mean overall tax revenue declines eventually?

This statement is true for everywhere, not just CA. Why should it be different here?

From a European perspective, I was surprised by the fact that California is home to some of the most powerful US industries and countless wealthy individuals while at the same time, the state is broke.

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