Californians Leaving for Greener Pastures

After working in California for four years, I returned home to Montana in June of 2017, and jumped into planning my wedding to my then-fiance’ that August in our hometown of Helena. We lived in Utah for a school year – she was teaching art, I was working online – but, by the 2020 census we were home in Montana again. As I filled out the census, I mused to my friends back in California that, by filling out my residence in Montana, I might be the tipping point that awarded Montana another representative, and cost California one.

Results are in, and while which individual was *precisely* the one to tip the scales is of course unknowable, Montana did gain a second seat in the House after three decades of having a single at-large Representative. California lost one for the first time in its history.  Conservatives were quick to point to this as further evidence of the supposed leftist apocalypse that was California, with wealthy, Galt-esque residents packing up their bags and heading to greener pastures to escape the state’s “crushing income taxes”.

But I suspect – and the data bears this out – that most of the people leaving California were much more like myself, leaving not because their incomes were taxed too heavily but because they could not afford housing in the overinflated markets. They were also stifled by the high cost of living that came from sales taxes and high rents.  Aspects of the California economy are causing the poor and middle class, not the wealthy, to struggle. But, the root is what they do not tax as much as what they do. The tax structure is set up to protect the interests of incumbent owners of expensive properties does exactly that, and the rest of Californians pick up the tab.

A look at who is leaving California is available here, and the results are quite contrary to the narrative. While some wealthy individuals and firms – Elon Musk springs to mind – may be noisily moving to Texas, the majority of people leaving are making under $100,000 a year.  In fact,, those making above that mark are more likely to relocate to California than to leave it.   

The source of the problem is that Californians suffer from the highest poverty rate in the country when adjusted for the cost of living, taxes, and transfers – a measure called the Supplemental Poverty Measure.  There are several factors at play in producing such a high cost of living, but the most prominent include rising rents and high sales taxes.  Both of these are exacerbated by California’s laws restricting the taxation of property.  Prop 13, passed in 1978, limits property tax rate to 1%, and sets taxes based on the last sales price, rather than the market value, of property.  This has had deep impacts on California’s political economy.

For one thing, incumbent homeowners may pay much lower property taxes than new owners, since their taxes are based on the year in which they bought their property. This discourages relocation, as a newly-purchased property will have a much higher yearly cost; property transfers have fallen considerably in California since 1978. Along with regulatory constraints and other problems common to most states, this has hindered the provision of housing, by reducing the cost of withholding land from the market. Moreover, since land has tended to appreciate in most of the state, the tax structure ends up taxing land at a rate far below 1%. Combined with exceedingly low interest rates, this has made land a good passive investment and has reduced the incentive to develop new lots. When Mark Zuckerberg buys and tears down four houses adjacent to his for more privacy, he can do so in the confidence that his taxes on those millions of dollars’ worth of Palo Alto land won’t rise much above 1% of the purchase price in 2016 when he bought them – regardless of what happens to the land value over the years.

The decline in property tax revenue has also pushed the state to adopt higher sales taxes. Not only does the state collect a 6% tax itself, but counties and cities are required to collect an additional 1.25%, and many opt to collect still higher rates.  The reliance on tax collected from retailers has also encouraged localities to promote commercial development over residential offerings, skewing zoning and further driving up rents. While some essentials like groceries are exempted from the sales tax, the result is likely still regressive, hitting lower and mid-income Californians the hardest. 

All of this adds up and contributes to the fact that nearly one in four Californians is living in poverty according to the supplemental poverty measure. California critics are right on one point – the tax code in California has created a major problem. But it’s the burden it places on the working class that they should be worried about.  Until Californians show a willingness to shift that burden, the 2030 census may be no kinder than the 2020 one. 

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