This report analyzes the economic and social costs of the high school dropout problem in California from the perspective of a state taxpayer. The authors' analysis considers the consequences of this problem in terms of labor market, tax revenue, public health, and incarceration costs. The authors' quantification of these costs reveals the sizeable taxpayer benefits that stand to be gained by aggressively combating the state's dropout problem. Their analysis reveals the following findings: (1) According to the California Department of Education, 98,420 public high school students dropped out of school in 2007-08, suggesting 19 percent of California high school students in any ninth-grade class will drop out over a four-year period. Hispanic and African American students drop out at an estimated rate of 24 percent and 33 percent respectively; (2) California dropouts experience difficulty in the labor market. They are more likely to be unemployed or out of the labor force and twice as likely to be living in poverty; (3) The lower earnings of high school dropouts cost the state more than $54 billion per year in lost taxable personal income; (4) Dropouts report worse health than graduates and require more public health resources. Close to 20 percent of California high school dropouts report fair or poor health and close to half receive Medicaid; (5) Dropouts drive up the state's incarceration costs. Over a lifetime, a dropout costs the state $8,484 because of higher incarceration rates than higher-educated peers; and (6) California's economy will benefit tremendously by reducing dropouts. The authors estimate that each prevented dropout will result in a present value lifetime benefit of $28,227. By permanently cutting the dropout rate in half, each new graduating class of high school students would yield more than $1.4 billion in direct gross economic benefits to the state. Completely eliminating the dropout problem would save the state $2.8 billion annually, or approximately 14 percent of its present budget deficit. (Contains 9 tables, 9 figures, and 40 notes.)