California Tax Rates Lead To Exodus

In the past I have touched on the subject of Californians migrating to other states to escape high taxes and an unfriendly business environment. A more in depth report has since been released. One factor cited in causing this exodus which supports my earlier argument:

…is state and local governments’ constant fiscal instability, which sends at least two discouraging messages to businesses and individuals. One is that 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.

Another factor is a high unemployment rate in California, higher than the national average, which attracts people to states with low unemployment, such as Texas, which is the state most migrated to by people leaving California.

Taxation also appears to be a factor, especially as it contributes to the business climate and, in turn, jobs. Most of the destination states favored by Californians have lower taxes. States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are prompting businesses to locate outside California, thus helping to drive the exodus.

Although California leads the pack in terms of scaring away it’s citizens, New York, New Jersey, Illinois and Michigan have all seen similar drops in populations throughout the 2000’s with the destination of the masses being most often Texas, Florida, North Carolina and Arizona. The impact on California of its citizens migration is especially harmful to the states’ finances because of how much it depends on personal income taxes to raise state revenue; personal income taxes for those making over $48,000 per year are 9.3% which is higher than millionaires pay in 47 states. This is why California has seen a disproportionate amount of wealthy residents leave the state.

Some people moving out of California are retirees who tend to have more money, where as others are young families trying to get a good start, and therefore do not yet have much money. This explains why:

while Texas took in the largest number of former Californians between 2000 and 2010, it was Nevada that received the largest share of formerly Californian income: some $5.67 billion in income shifted from California to the Silver State during that decade. Arizona had the next biggest gain at California’s expense, at $4.96 billion, followed by Texas, at $4.07 billion, and Oregon close behind, at $3.85 billion.

The likely trigger of the exodus of California was likely the recession which hit there in the early 90’s. California’s unemployment rate had been similar to the average American rate, but when it became higher than the U.S. average is when migration from California sped up. Taxes however, seem to be the deciding factor of businesses when deciding where to locate, or where to relocate. In the early 90’s many Californians saw the writing on the wall.

Taxes were also on the rise during the early 1990s, though political signals may have had more impact at the time than the actual dollar amounts. According to Tax Foundation data, the overall state and local tax burden in California rose from 10.0 percent of income in 1988 to 10.6 percent in 1992. California’s increase was not much more than that of the U.S. as a whole (which saw a rise from 9.7 percent to 10.1 percent), but it sent some troubling signals to job-producing businesses. One was that the state government, which had powered through the 1980s without resorting to any broad-based tax hikes, suddenly seemed unable to pay its bills. Another was that the tax revolt that had started with Proposition 13 in 1978 seemed to be out of gas. When the new Republican governor, Pete Wilson, signed off on a $7 billion tax increase in 1991, it was a sign that California’s political leaders had abandoned any notion of trying to spur growth through tax cuts. Wilson’s revenue enhancers were temporary, and, coincidentally or not, the state recovered briskly after they expired in the mid-1990s. But as the state later learned in the 2000s, its fiscal distress was far from over.

There were, of course, other factors which contributed to the decline of California’s population which you can read in the full report. One thing that is made quite clear through the study however, is that people respond to economic conditions. Tax increases are not something that occur in a vacuum, they have real world effects and consequences. States need business to create revenue, and therefore states must compete to attract businesses which will supply the state government with the money it needs to function. California demonstrates how to drive business away, where as other states like Texas demonstrate how to attract business, jobs, and revenue.

Click here to read more on the subject of lower tax rates creating more tax revenue, and lower taxes improving the economy.

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