Wealthiest Californians are leaving the state. It's bad news for the economy
latimes.com
latimes.com
Let's assume it's $150k for 2023 (high)
> What’s different is that in each of the prior two years, more than 250,000 Californians with at least a bachelor’s degree moved out, while an average of 175,000 college graduates from other states settled in California
That's 75k net loss, assuming 100% employment (high)
> In California, the top tax rate for personal income is 12.3%.
Assuming all loss income was at the highest bracket (high), the total loss in tax revenue: 75k * $150k * 0.123 = $1.38B
Realistically, the number could be lower because the calculation above is conservative.
> State budget analysts recently projected a record $68-billion deficit in the next fiscal year because of a 25% drop in personal income tax collection in 2023.
That's $1.38B vs $68B
I think we all agree that California has lost population, but I feel like the article is manipulating statistics to drive a misleading narrative. The deficit is real and needs addressing. It's more likely due to income dropping (lower salary due to lay off, lower realized capital gains, lower passive income, etc), rather than the "wealthiest" are leaving the state.
Ultimately, all money in circulation eventually goes into taxes. Put another way, if I trade something and receive $100 and 10% of that must be sent to the gov. I now have $90. I take that $90 and buy something, that person now has to pay $9 to gov and they have $81.. and so on.
Hopefully, people also use that money to generate new goods and thus generate more capital inflows to the state. When that happens, the state gains more wealth via taxes.
That loss is likely closer to $11.25B ($150k * 75k) than $1.38B. (Note I’m not using exact numbers, just pointing out the $11.25B upper bound)
That said, I do think the article is conflating. In reality: job loss, migration out of the state and generally sluggish economy is going to lead to the deficit, not just the migration.
This leads to the parallel question, how does this work on a national level? What percentage of American earnings stay in America, and thus eventually go to federal taxes? Probably a higher percentage, but still less than unity. But if we assume it all does, this leads to an apparent paradox: if all the money eventually goes to state taxes, how can all of it also go to federal taxes?
I'm not sure this is a helpful way to view what actually happens. What am I missing?
False condition. California has plenty of water, as evidenced by its wasteful farming practices, which consumes 80% of it [1]. As with most of its problems, California’s retail water “shortage” is a policy choice.
[1] https://water.ca.gov/Programs/Water-Use-And-Efficiency/Agric...
Sure. They’re still wasting the water.
> more population in permanent settlements won't help mitigate the problem
It also won’t meaningfully worsen it. Water is simply not a real barrier to development in California.
"Don't look up" is a film that could be perfectly be based on the California groundwater crisis.
Would these be the same communities pumping their aquifers dry [1] to export almonds and alfalfa?
[1] https://www.npr.org/2021/07/22/1019483661/without-enough-wat...
Abstractly using up local resources until forced to import them isn’t a policy issue, it’s simply rational behavior.
How is that relevant? The point is they wasted water. They’re not victims, they’re the source of the problem. People moving into California’s cities are a rounding error to its farms’ wasted water.
That said, it depends on people’s total state tax burden. If it’s too high they will leave to lower tax burden states.
This is one of those slow moving things like when corps were leaving NYC in the 80s. It’s hard to stop it. Adding taxes is too attractive. Eventually companies and people will have enough reason to leave.
Many are not there yet. You will never have everyone willing or able to leave. But on occasion you get enough leaving so that a state is left with a potential which will not become realized.
Every time a person cashes out their home that they bought for a couple buttons and some twine in 1982, then moves to Arizona to retire, California's tax revenue goes up, because the people that take their place actually pay appropriate property taxes on the 2023 value of the home.
How would this work? Who has the authority to decide where and how home construction happens?
The property owner and the state.
California has passed some laws recently which already take a step in this direction. SB9, for instance, made it so that on some parcels of land local municipalities were not allowed to block existing property owners from building a duplex.
As to to the question you answered, I could understand land value taxes, or some other forms of taxes that are actually based on the infrastructure cost for supporting your home. (And you could add exemptions/tiers for people who can't afford it, that's beside my point.) But property taxes seem nonsensical for exactly the reason you mention: that they depend on the value of the home (at whatever point) rather than on the cost of the infrastructure itself. Whether my home sells for $1 or $1M, my pipes and wires are going to act the same. And neither of those tells you anything about my means for payment - I could easily lose more money on a more expensive home.
Hot take: One possible compromise is limit prop 13 to a single property maybe two bed two baths for the owner and each adult state resident also gets this "credit"? I mean what the owner and every adult living in the household can help keep the property tax low but only for their own primary residence. but beyond that raise the property tax every year based on property value.
In the comment you just replied to, weren't they specifically saying this wouldn't apply to your primary residence?
> What worries me is California refuses to raise property taxes
Sure, if you're trying to increase taxes somehow, then the proposal in your reply could be one way to do it, and it sounds less painful than increasing everybody's property taxes. That logic isn't what I have issues with, since you're just comparing different ways to do property taxes regarding primary residences. (This isn't to say I agree or disagree with it.)
> Raise property taxes because without it, your income tax will have no upper bound.
This is the part I took issue with. It appeared you were trying to motivate property tax increases by arguing income taxes are an obviously worse way to make up for them, but... why? I didn't understand the logic behind that, and that's what I was asking about. If I'm a policymaker trying to choose between increasing income and property taxes, why should I choose property taxes to be the one to increase?
But that's not relevant to why a policy maker should choose to raise property tax over income tax. You could argue both ways here - income taxes are straightforward because you can basically get your cut at the source of income but property taxes are good because you can't hide or take land with you to another state. And in general, I am not an expert on this or any matter but California is very lopsided with prop 13. I don't even live in California.
StrongTowns likes to talk about it: https://www.strongtowns.org/journal/2019/3/8/if-the-land-tax...
No, it doesn't. Assuming that a taxing jurisdiction in California was to raise property tax rates, Prop 13 would apply the rate increase to all taxpayers in the jurisdiction. The lower effective tax rate for people who have owned a property longer under Prop. 13 isn't a limitation in their nominal rate, it is a limitation in their basis value (assessment increases are generally limited to the lower of 2% or the rate of inflation each year.)
But that's all theoretical, in reality, Prop 13 means there won't be any increases to property tax at all, barring repeal or amendment of Prop 13 itself.
While everyone talks about the limitation on tax basis value assessment increases in Prop 13, Prop 13 also sets a very low maximum property tax rate of 1%, and every taxing jurisdiction in the state already has their rate set at this rate, so it is impossible under Prop 13 to raise property taxes rates.
I don't know how much this applies to California, I think they cap property tax increases there, not sure how the rates differ by town?
A single state-wide standardized marginal property tax rate would probably work best. Those with $5 million+ single family homes should be paying a higher percentage to discourage that type of housing. Additionally that tax money could be collected at a state level and distributed more equitably (to towns that aren't as wealthy).
Ultimately single family homes need to be phased out in these kinds of places and replaced with higher density along with mixed zoning. Mixed zoning should reduce the need for more car based infrastructure which is extremely expensive and allow more efficient public transit to be built. That would lower costs for regular people since they wouldn't need a car to get places.
At which point, one of the two things will happen:
(1) Housing price will fall down because there are more on the market.
(2) Or, the houses will be snatched up by people who can pay the price, many of which are young couples working in high-paying industry willing to start a family. It will cause net population increase. Or, even better, they can be replaced by dense residential blocks.
Either way, it sounds like desirable outcome to me.
The TCJA capped the SALT deduction at $10k for married filers, which is an absolute joke to anyone who pays taxes in CA or NY. But that cap goes away in (I think) the 2025 tax year. I don't think CA has to do anything but wait out the clock and make damn sure that its representatives stonewall any legislation to extend the SALT cap.
And yes, I know that econonmists absolutely love the SALT cap because it's a tax on non-poor people. But the point of the tax code is not to extract every last penny from non-poor people -- it's to make sure everyone is contributing fairly to a well-run society at all levels. If you want states to be the laboratory of democracy, that's fine, but you can't do that by penalizing states that have high taxes in order to pay for services that the federal government doesn't provide. And that's precisely what the SALT cap does (and was explicitly intended to do).
That makes this sort of thing annoying. The odds of arriving at "why did this happen?" through rational discourse are very slim. However, I do recall a number of years ago people making arguments like "lol what are they going to do, leave?" and it appears that was wrong. And I would encourage people who are gung-ho about US debt overall to reassess their beliefs in light of that - it doesn't look like the money was invested productively to me and it is a dangerous assumption that there will be wealthy people around to pay off someone else's stupid spending.
But the real problem here is not that the current policies don't create enough wealth. That is a problem, but the real problem would have been a decade or more ago. It is like when the local dam runs out - risky decisions and bad principles would have taken root decades ago that were, in hindsight, risky and reckless.
The core reason is that, even compared to places like Florida and Texas that have seen property prices go up a lot lately, California's urban areas are hideously expensive. The only way that I know of to fix this, is for a bunch of people to leave those high-density, urban areas. They could move to inland California, but if they're leaving the city they're in, they often decide to go to another (less expensive) city, in another state. This is the most direct solution to the problem of property being too expensive in California.
Not saying that California has perfect policies or anything, but their biggest problem is the runup in property prices caused by past successes.
1) they cannot actually afford it, and will find this out in a few years
2) they are being bought as investments by REIT's and such, not by real people
3) they are being bought by foreign money as a way of parking wealth in the US, because it is perceived as a safer place to have your money than the home country
There could be other explanations, as well, but these are three that come to mind.
One problem with very progressive taxation is you become dependent on relatively few people, possibly with their own income sources undiversified. If these people move, the stock market has a flat year, or the tech sector gets hit, that's a lot of money, even if 95% people in the state are still doing ok.
>> It’s probably going to be some combination of cutting back spending and raising taxes
The article almost acknowledges this, but if taxes really are chasing away people, even more taxes gets you into a death spiral.
Maybe for a city like Detroit but California has something that most people, including most rich people, really want: great weather and lots of accessible nature. The other problems are solvable but geography is destiny.
This is the first article that has enough concrete data to make me worried but we've been through this before and the state is in a much better place than it was 20 years ago with Davis and Schwarzenegger.
All of this has happened before and all of this will happen again.
Such as what happened to New Jersey when one person, David Tepper, moved to Florida.
Not true. Every time a property is sold, the taxes are reassessed. And in CA, that always means an increase.
There might be something to the article, but that's a year out of date. The Nasdaq was up 43% in 2023. It makes me wonder how much of the article might have already played out.
- removing the SALT deduction hurts Californians (and NY most) with their high taxes and high wages
- Capping the mortgage deduction to $750k only matters in places where houses are over $1MM (like California)
- Because even federal taxes are progressive, if you can work remote make half as much money in a place that costs half as much, you'll take home proportionally more
https://joelkotkin.com/wp-content/uploads/2022/01/Restoring_...
No income tax, better internet, better entertainment. I’m frankly confused how long CA will continue towards its own destruction.
A casual search shows that Tennessee receives USD 1.46 for every USD 1 it sends to the federal government. The rest of us seemingly pay for Tennessee's refusal to increase personal income and peoperty taxes.
All infrastructure requires maintenance and the statistics I get hung up on is that it costs over a million dollars to pave one lane mile of road. This is something we need to pay every thirty years. Think about how much road we have in the US or in your case just Tennessee. Do you think Tennessee can pay for all public roads (other than the interstate) with state and local money? How do you avoid taxes from going up while also avoiding infrastructure from crumbling?
That said, they don’t offer much (which is fine). Infrastructure is not really expensive compared to social programs. Maintaining infrastructure is often way cheaper than building new infrastructure. Where as maintaining social programs are massive year-over-year.
Look at California's expenses: https://open.fiscal.ca.gov/transparency.html
Most is healthcare (>=50%), followed by education (~25%)
Compare that to Tennessee https://www.tn.gov/transparenttn/state-financial-overview.ht...
If you look at Tennessee education is (>=40%) and healthcare is second (~25%).
From what I’ve seen the massive church network in TN combined with targeted social programs work well for TN.
That said, often those funds are allocated based on defense contracts, military bases present, assistance for the poor, education grants, etc. for instance, the federal government grants funds for roads based on drinking age (among other things).
Even if that was your argument, California is granted more than it pays in.
https://worldpopulationreview.com/state-rankings/federal-aid...
Texas actually has more of its budget come from federal funds than from Tennessee (and New York only has 1-2% less than TN).
The Tennessee model works because they don’t spend as much money, so they tax less.
This is accounting. The production of one provides for the other.
> California is granted more than it pays in
Whoops, my bad. New York and New Jersey, then.
> Tennessee model works because they don’t spend as much money, so they tax less
This is part of the story. Without those other states wealth redustribution, Tennessee would have to tax more or provide less.
Again, that’s not how the system actually works. The federal government quite literally prints the money. No work was done, no taxes collected, funds are just handed over. Later taxes are collected and the “accounting” is “done” (ie bonds issued for the deficits)
The US government is currently running a >$1T deficit per year (more than all states receive combined btw).
> This is part of the story. Without those other states wealth redustribution, Tennessee would have to tax more or provide less.
It’s not part of the story really.
All states effectively receive 30-50% (with TN right in the middle at 40%) of their state budget from the federal government. It’s kind of a moot point because they receive those funds often for unrelated things (such as military bases).
Every state simply wouldn’t provide services that aren’t being funded. I really don’t see the argument, particularly as many of the reasons states receive these funds are because the federal government provides them (many are healthcare services, distributed based on population). New York may reject some funds based on the desire not to issue some program, for instance.
I think the fact it’s assumed California pays more into the system (without research) is just highlighting the lack of knowledge on the topic.
It’s not really highlighting how TN doesn’t work, when NY received a similar percentage of funds for their states budget (~40%).
Not to mention the infrastructure - The electrical grid is already creaking, and the commuting situation is already absurd in and around the major metro areas.
The US has a federal system. States are the primary entity, not the federal government -- it's the opposite of a centralized government such as France.
Every state just sets whatever policies it wants. They're not "pitted" against each other any more than Spain and Italy are "pitted" against each other. They're just each doing their own thing.
This is all just to say, it's not some intentional policy at the federal level. It's just how it's always been ever since the states chose to come together and form a country. The (original 13) states came first.
(BTW I'm not defending this arrangement, just describing it.)
…which is definitely not also the case in California.
> I find it fascinating how the US government pits every state against each other. Yes, people are leaving a high tax state to a low/no tax state.
This is a core democratic mechanism in the US: citizens leaving one state for one which they believe will better suit their beliefs, needs, aspirations, etc. — to “vote with your feet”.
This competition for citizens and business forces governments to respond to the needs of citizens — rather than mistreat them for ideological or feudalistic goals.
Those 6A schools don’t build themselves. But you can get Spain’s pension funds to build your tollways. God forbid WFH becomes a thing in TX.
US States often orient their taxes to take advantage of local economies, attracting certain types of businesses or residents.
Sometimes the reasons are political or weird quirks, like in Texas where taxation is (by design) very difficult to change under their constitution.
Beyond that, sales tax on consumption. Property taxes on homes, vehicles, etc. gasoline tax for roads, typically both Federal and State. Nevada in particular is a hospitality state with much tourism so they’re likely getting good tax money on this.
Counties within a state and cities and towns may also add on, say a percent or two for schools or a big infrastructure project. Sometimes these are temporary measures for a fixed number of years. It’s all variable and complicated.
Source: Rockefeller Institute's 2023 report, table 12A. <https://rockinst.org/issue-area/balance-of-payments-2023/>
The only states whose residents have on average paid more taxes than they receive back in terms of federal spending from 2015 to 2021 are ~~NY~~ CT, NJ, and MA. ~~NH, WY, ND, UT, SD, VT, and NE (+$3,907~~ WA, NY, UT, CO, NH, CA, and IL (+$1,794 seven-year per capita average) are also in the bottom ten in terms of being closest to breakeven. To put another way, residents of all 40 other states get more federal spending per person than they pay in federal taxes, than IL. Source: Rockefeller Institute's 2023 report, table ~~12A~~ 12B. <https://rockinst.org/issue-area/balance-of-payments-2023/>
Here's a breakdown of their 2020 revenue: https://ofm.wa.gov/washington-data-research/statewide-data/w...
TL;DR:
- Washington is slightly more dependent on charges for services than the U.S. average.
- Washington depends more heavily on excise taxes, including the general sales & use tax, selective sales taxes, and the gross receipts tax (business & occupation tax) than most any other state.
- Washington is the only state with a general gross receipts tax - the Business & Occupation Tax.
Nevada is mostly desert with vast strands of land people do not inhabit. They rely on mines, the US government, and being next to California for their money. Area 51 for example. The Yucca Mountain Nuclear Waste Repository as another.
California in the past banned gambling so that is how Las Vegas got started. As far as I know now you can only gamble in the state lotteries or on Native American reservations.
They are also trying to do the Delaware thing and be a place for corporations to incorporate in. Many states charge franchise fees and income taxes on corporations. Nevada charges nothing except yearly filing fees. Last I checked Microsoft chose this state for their legal headquarters.
Local jurisdictions levy taxes on property and sales.
With the adoption of Prop 13 they eliminated much of the property tax revenue, and then ratcheted up the income and sales tax to pretty much max amounts while only collecting property tax from new(ish) home buyers. The Trump tax cuts then penalized upper-middle-class tech workers, all while continuing to reduce benefits. Utility deregulation has led to rolling blackouts during potential windstorms, and poor forest management has brought about some big fires.
Other states are also in on the zero-sum game that is bidding tax breaks to get companies to relocate.
This seems like a normal cycle of capitalism. If CA wants to change the game, they could consider options like the return of low-cost (free) schooling for CA residents, normalizing their property tax structures, or opening a single-payer healthcare system to CA residents.
There are other ways to achieve the basic objective without creating the same side effects. For example, Colorado’s TABOR has a very similar objective with a very different mechanism that slows property tax growth but does not pressure people to stay put in their current home.
No, voters overwhelmingly support Prop 13 in general, and feel that property taxes (which in fact are extremely low by national standards due to the Prop 13 nominal rate limit even before considering the Prop 13 assessment increase limit) are high in California. (What's actually high is property values, as a result of both Prop 13 and development policy -- and the development policy is itself, in part, due to incentives created by Prop 13 which align with those created by homeowner NIMBYism.)
It has been tweaked before, and you could maybe pass tweaks again that would enhance revenue in general, but by and large the basic structure is going to be very hard to change.
Unless Sacramento has high conviction of the law surviving court challenges, they shouldn’t reättempt it. Its mere discussion is a powerful forcing function for decampment.
It would be nice if the FTB contacts your bank about contacting you before the seizure, but that's not what they do. It can be particularly inconvenient if they seize all of the funds (and they will if that's what is estimated to be owed), as it may be difficult to hire a CPA in that event. Hopefully the paperwork is in order or a CPA is already hired.
Edit
My friend recently had his funds seized from when he moved out for the 2016 year. He got 1/2 back but his paperwork is not in order & got cleaned out. Currently does not have enough to hire a CPA to get the rest.
Btw, I had already done several of the steps listed in https://www.modernfp.com/blog/leaving-ca
I will never move back to CA. Another word of warning from a CHP officer. If you happen to drive in CA as a former resident, make sure you have your out of state license on you. If you forget your wallet, you could be cited for driving with an expired license.
They may yet expand them further, we'll see.