For generations, millions have come to California to make their fortunes, relying on the state’s own seemingly limitless fortune of natural resources, favorable climate, and economic opportunity. But now California’s longstanding identity as the nation’s leading innovator, wealth-builder, and aspirational locale is threatened. The state now projects a record $68 billion deficit in the next fiscal year, thanks to a 25 percent drop in personal income-tax collection in 2023; the state’s Legislative Analyst’s Office predicts continued operating deficits through 2028. But California is plagued by even more foundational problems. The state has become increasingly uncompetitive and unequal, losing both critical business and human assets at an astounding pace.
California’s economic and fiscal crisis comes as Democratic Party insiders and pundits seek to elevate the state’s governor, Gavin Newsom, as the Democratic Party’s presidential heir apparent. Washington Democratic media commentators such as Al Hunt and Douglas Schoen see Newsom as preferable to doddering Joe Biden. They seem oblivious to the economic realities in the Golden State.
During his nationally televised debate with Florida governor Ron DeSantis, Newsom boasted that his state’s economy is “booming” and leads the nation. “California has no peers,” Newsom declared. “California dominates.” Even the administration’s usual supporters, such as the Los Angeles Times, found these claims dubious, given the state’s rising unemployment, declining number of high-wage jobs, soaring housing costs (not one California metro boasts housing prices below the national average), and onerous regulatory regime.
The state is in a demographic free fall. The Census found that California lost a net total of 1.7 million people from domestic migration between 2016 and 2022. The populations of Los Angeles and Orange counties shrank between 2020 and July 2022, the Census found; those counties are even hemorrhaging foreign-born residents, a trend that started over the past decade. Looking ahead, the state’s Department of Finance predicts no population growth to 2060 and a reduction of well over a million people for L.A. County.
California’s tax policies are costing the state both residents and political power. According to the latest Census data, California’s population dropped by 342,000 between 2021 and 2022. In that time, 102,000 Californians moved to Texas, and 42,000 Texans moved to California—a net gain of 60,000 for the Lone Star State, which has no income tax, and an equivalent net loss for the Golden State, where the top rate hits 13.3 percent. In 2020, California lost a congressional seat for the first time. If current trends persist, it could lose another four or five by 2030.
What matters is not only how many people leave but who is fleeing. For years, the conventional wisdom held that the departees were holdovers from the Reagan era or poor people, lacking the education to make it in the world’s most sophisticated economy. Today’s trend, as a Public Policy Institute of California study reveals, undercuts that view: the rate of outmigration by Californians with a college degree has risen sharply since 2019, reversing a trend of net in-migration that characterized the state since 2011. By comparison, according to an analysis of Census data by Brookings Institution demographer William Frey, an average of only 175,000 college graduates from other states are settling in California each year.
These shifts impose economic costs. According to IRS data, analyzed by economic forecaster Jim Doti, the inflow of new domestic migrants to California making $200,000 or more brought an adjusted gross income (AGI) of $7.3 billion in 2018, while the outflow of migrants from California to other states in this income bracket constituted an AGI of $13 billion. These trends are getting worse; the net outflow of high-income earners and taxpayers swelled to $9.9 billion in 2019, to $13.7 billion in 2020, and to $20.4 billion in 2021.
California faces a significant income gap between those coming into the state and those going out. Many high-earning former residents are heading for Florida, which has become a Top Five destination for emigrating Californians. Statistics show more older Californians, often with houses to sell, are likely to move to Florida, where—like Texas, Nevada, and Tennessee, each seeing some migration from California—residents pay no personal income tax.
The state’s leaders should see these trends as warning signs, but they don’t seem motivated to change their tax policies. Long-time observer Dan Walters, from the nonpartisan group Cal Matters, rightly credits California’s deficit to Governor Newsom and the one-party, free-spending legislature’s refusal to face reality over the past decade. Walters added that, in the past, “then-Gov. Arnold Schwarzenegger and legislative leaders created a commission to suggest remedies,” which “recommended the state reduce its dependence on income taxes and shift to a revised form of sales tax.” That report was buried, Walters notes, “as soon as it reached the Legislature.” Policymakers assumed that California’s tech and real estate wealth could always fund even the most expansive welfare state. Yet, as the source of that wealth departs in growing numbers, it’s unclear how this current deficit will be remedied: the state’s “rainy day fund” and special school reserves add up to only $32 billion. That figure sounds impressive, but it covers less than half the current deficit.
Taxes are certainly a factor in California’s decline, but an arguably bigger problem is its Kafkaesque regulatory environment. The Mercatus Center ranks California as having the highest number of business-impacting regulations in the country. California’s number of regulatory restrictions (about 396,000) is well above that of other large states like Texas (about 227,000). This matters in part because, as a 2021 Chief Executive poll found, CEOs rank regulatory climate among their top concerns in deciding where to locate their businesses.
California’s expansive regulatory regime is largely the result of its climate-change policies, which have helped create the highest energy prices in America. High electricity costs and draconian regulations have reduced potential employment in key blue-collar industries such as logistics, manufacturing, and home construction. This, in turn, as prominent land-use lawyer Jennifer Hernandez has noted, has functioned as something of a “green Jim Crow” by greatly reducing opportunities for working-class minority Californians.
Climate regulations, Hernandez argues, also make houses more expensive. The notorious California Environmental Quality Act (CEQA) requires developers to undergo a multiyear public process to assess the environmental impact of almost every new project. Under CEQA’s terms, any party can object and appeal an approved outcome for virtually any reason. The effect: stopping almost all major development in the state. The Tejon Ranch project, which would have developed more than 50,000 homes in a rural section of northern Los Angeles County, for example, has been enmeshed in legal wrangling for more than two decades. After the project’s leaders made multiple changes to their master plan, a California judge rejected even its scaled-down plan to build one-third of those much-needed homes, citing the need to protect the area’s biodiversity. Thanks to these and similar policies and court decisions, California has the least-affordable housing of any state in the country, according to Demographia, which maintains a long-standing database for every major city in the world. Its 2023 rankings identified housing markets in Los Angeles, San Jose, San Francisco, and San Diego as the four most expensive in the United States.
The punishingly litigious climate enabled by CEQA is partially why companies and developers are looking out of state, particularly when they want to expand operations or build a new project. Joseph Vranich and Lee Ohanian, in a Hoover Institution report released last year, observed that in 2020, California had only one-seventh the number of company-initiated capital projects than did the leading state, Texas. Additionally, from 2018 to 2021, 352 companies headquartered in California moved their headquarters out.
When companies choose to build outside of California, people and wealth move with them. While four of the highest-valued tech firms—Meta, Google, Apple, and Nvidia—remain in California, generating enormous wealth, the state has seen a slow but steady erosion of its tech edge. Chapman University, in partnership with UC Irvine, created an Advanced Industries Index that compares employment and company- and wage-growth rates in 50 technology-driven industries in metro markets across the country. The researchers found that, since 2005, California has seen its share of the nation’s advanced-industry jobs stagnate. The Golden State has steadily held about 19 percent of the nation’s advanced-industry jobs since 2005, while lower-income-tax states have seen their percentage of the country’s jobs in advanced industries rise from 25 percent to 30 percent over the same period.
These failures reflect poorly on Gavin Newsom’s leadership. While East Coast reporters hail him as the next savior of the Democratic Party, Newsom, not surprisingly, finds himself increasingly unpopular with California voters. As his “no peers” economy boast rings increasingly hollow, Newsom likely will place greater emphasis on red-meat progressive issues, such as transgenderism, abortion, and Donald Trump. Humility would be a better path. Rather than trumpet his supposed successes, Newsom needs to face up to the results of his policies and address the record deficit that has turned California’s very large fortune into a much smaller one.