Due to high taxes, burdensome regulations, lack of public sector reforms, and a lackluster job climate, more people have left California than come to the state since 2005, according to a comprehensive study by the Manhattan Institute released on Tuesday, suggesting California is no longer “perceived by most Americans as the land where dreams come true.”
In the report, titled “The Great California Exodus: A Closer Look," Tom Gray and Robert Scardamalia found Californians have fled to states like Texas, Arizona, Nevada, Colorado, Idaho, South Carolina, and Georgia because those states have a better economic climate with less taxes and regulation.
The report found that between 1960 and 1990, 4.2 million Americans moved to California and helped accelerate California’s booming economy. Since 1990, though, California has lost nearly all of that gain, with net domestic out-migration averaging 225,00 residents a year. Between 2000 and 2010, out-migration has resulted in lost income of 5.67 billion to Nevada, $4.96 billion to Arizona, $4.07 to Texas, and $3.85 billion to Oregon.
The study found that “if all these trends continue, California may find itself in a situation similar to that of New York and the states of the midwestern Rust Belt in the last century, which have seen populations stagnate for decades, or even fall.”
Mitt Romney, on the campaign trail, has often warned that under four more years of President Barack Obama, the nation could become more like California. Decades ago, this would have been taken as a compliment. But, as the report details, it is anything but so today.
Californians are leaving for states like Texas because those states have more jobs and economic opportunity. The report notes that “more often than not, people move because there is a better opportunity elsewhere” and “families looking for economic opportunity travel to Texas now,” where the economy, unlike California’s, has been “booming.”
Those families had once traveled to California. But that is no longer so because companies “set up shop where conditions are more conducive to making a profit.” This also impacts retirees, who may move to “migrate to be near children who have taken jobs in another state.”
Consider Oklahoma. As the study notes, net migration from California to Oklahoma totaled only 775 residents from 1991 to 2000. Ten years later, Oklahoma’s job market was stronger than California’s, and 2,125 Californians moved to Oklahoma from 2001-2010.
Further, the study found most of the states Californians are fleeing to are right-to-work states. Of the ten top states Californians have fled to, "seven (Texas, Arizona, Utah, Idaho, Nevada, Georgia, and North Carolina) have right-to-work laws that explicitly ban the compulsory union shop."
The study found most of the “destination states favored by Californians have lower taxes,” and, as a general rule, “Californians have tended to flee high taxes for low ones.”
The study also examines several trends that may have instigated or accelerated the out-migration from California to more economically friendly states since 1990.
In 1990, California’s recession was worse than the rest of the nation’s, and the state’s unemployment rate surpassed the national average.
At the same time, not only were taxes on the rise in California, but residents and business owners felt that “the tax revolt that had started with Proposition 13 in 1978 seemed to be out of gas” because even Republicans, like Gov. Pete Wilson, were supporting and signing off on tax increases.
“It was a sign that California’s political leaders had abandoned any notion of trying to spur growth through tax cuts,” the authors write.
The study found that “California’s volatile tax structure (it depends heavily on corporate profits and income from capital gains) and its inability to restrain spending in high-revenue years made the state government increasingly vulnerable to a recessionary shock,” and that shock arrived in the early 2000s.
Public Sector Instability
The authors note that long before California’s municipalities began declaring bankruptcy in 2012, California’s Standard & Poor’s bond rating, by 2003, was already at “BBB,” the worst in the nation. The state then was “patching together budgets through short-term borrowing and accounting tricks,” and, as a result, “when recovery arrived in the middle of the decade, it did not resolve the structural imbalances between revenues and spending,” which is the cause of California’s troubles today. As of 2012, California has the lowest S&P rating in the nation.
According to the report, the “fiscal distress in government sends at least two discouraging messages to businesses and individuals.” First, they “cannot count on state and local governments to provide essential services—much less, tax breaks or other incentives.” Second, “chronically out-of-balance budgets can be seen as tax hikes waiting to happen, with businesses and their owners the likeliest targets to tap for new revenue.”
“In contrast, a fiscally competent state inspires confidence that it can sustain its services without unpleasant tax surprises.”
One interesting note the authors found: “Of the ten states that sent the most people to California in the past decade, eight are high-tax jurisdictions—and the only two that are not, Illinois and Michigan, had low credit ratings.”
According to the report, California’s regulations make it more difficult for employers to stay in or come to the state. It cites a 2005 study by the Milken Institute that found California was the fourth worst state in which to conduct business. This study even left out the impact of regulations, which the report noted was hard to measure precisely because it was difficult to quantify “the cost of delays, paperwork, and uncertainty due to unfriendly laws and bureaucrats” and that this was “not an exact science.” The report cited additional “business climate” surveys that “rank California near the bottom in the regulation category.”
Population and migration pattern studies are reflective because they are important indicators of a state's political and fiscal health.
“Migration choices reveal an important truth: some states understand how to get richer, while others seem to have lost the touch,” the authors write. “People will follow economic opportunity. The theme is clear in the data: states that provide the most opportunity draw the most people.”
The report notes that California’s leaders can start to “do something about the instability of public-sector finances,” “rethink regulations that hold back business expansion and cost employers time and money,” enact policies that enable more development of land instead of allowing environmentalists to have a veto over any land-use decisions, which would make land cheaper and more livable.
How California confronts this situation "will send a strong signal, whichever way they go: the state’s voters will be deciding to continue on the path of high taxes and high costs—or to make a break with the recent trend of decline."
“California’s economy remains diverse and dynamic; it has not yet gone the way of Detroit,” the authors note. “It still produces plenty of wealth that can be tapped by state and local governments. Tapping that private wealth more wisely and frugally can go far to keep more of it from leaving.”
This study used data from the Census, the Internal Revenue Service, the state’s Department of Finance, the Bureau of Labor Statistics, the Federal Housing Finance Agency, and other sources.