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Many Californian businesses and people are moving out of California to other US states. Higher taxes relative to other states could be the main reason. The California experience provides lessons to sub-national governments worldwide, including in Australia. Broadly speaking, it suggests sub-national governments need to provide competitive tax rates and regulations that do not unduly inhibit businesses. That said, further research on the drivers of regional migration is desirable.

California, the most populous and prosperous state in the USA, produced $3,007 billion of economic output in 2020, surpassing France ($2,624.4 billion) and the United Kingdom ($ 2,709.7 billion) in terms of GDP^[i]. Dominant industries such as technology, entertainment, agribusinesses, tourism, among others, make a vibrant economic hub for people and businesses. However, something odd is happening in the golden state; people and businesses are fleeing out to other places such as Texas, Tennessee, Arizona, and Nevada with lower taxes (for income and corporate profits) and more business-friendly regulations than in California.

The golden state recorded a negative population change of 173,000 people, representing a 0.44% fall in the Californian total population, between July 1, 2020, and July 1, 2021. That net population change is composed of the natural increase of people (births minus deaths) and the net migration (the sum of net domestic and international migration). Both flows are facing a declining pattern that might be explained by many factors (see figure 1). For example, the natural increase of people has a downward trend due to higher deaths after the Covid-19 pandemic, ageing population, and fewer newborns. On the other hand, net migration can be affected by internal and external factors such as tax policies, business regulations, work rights, economic opportunities, and political factors.

Figure 1

Source: The State of California, Department of Finance, E-7. Prepared by Adept Economics. (https://www.dof.ca.gov/Forecasting/Demographics/Estimates/e-7/).

Another outbound flow that deserves our attention is the number of businesses leaving California. A study^[ii] of the Hoover Institution at Stanford University examined a dataset of 272 company headquarters reallocations from January 2018 to June 2021 in California. Lee Ohanian and Joseph Vranich highlight that California faces a significant relocation of company headquarters (in nearly all industries) to other states (e.g., Texas, Arizona, and Nevada). Their findings identify taxes, business environment, work regulation, utility costs, and declining quality of life, given the increasing living and housing costs, as important factors driving company relocations. The authors consider that the number of company relocations is under-reported due to information about small companies not being in the public domain.

Considering those outflows (people and businesses) from California to any place have diverse and underlying factors that may foster or deter the departure, evaluating which factors are relevant to explain those phenomena is complex. In that regard, two opposing opinions have addressed that issue. One group of analysts mainly blames taxes and other economic, political, and social factors for explaining the exodus in California. On the other hand, researchers from a group of universities (Berkeley, University of California, Cornell, and Stanford) point out that there is no evidence of an abnormal rise in residents trying to flee out of the golden state, according to a survey conducted from April 15th to May 8th, 2021^[iii].

An article based on domestic migration data from the US Census Bureau compares the top 10 inbound and outbound states in 2021. Mark J. Perry, a senior fellow at American Enterprise Institute, analysed many aspects such as work rights, state partisan composition, state tax burden, income and corporate taxes, businesses rankings, housing prices, cost of electricity, among others.  The author shows that domestic migration flows are moving to those states with lower taxes, better labour flexibilities, lower utility costs, lower median home price, and generally to Republican-controlled states which tend to be business-friendlier than Democratic-controlled states. California, which has the country’s highest top marginal state income tax rate at 13.3%, generally has bad comparative results relative to the top 10 inbound states. Other possible factors not mentioned in Perry’s article are the growing crime rate and sense of lawlessness due to California’s lax robbing laws^[iv].

Dan Mitchell, a libertarian economist, recently argued that the Californian exodus is driven mainly by the Californian tax system, which has the highest tax rates in the USA. Moreover, he points out that California is very unfriendly to taxpayers^[v]. Indeed, the golden state ranks No. 48 (behind New Jersey and New York) in the State Business Tax Index 2022 and No. 49 (just behind New Jersey) in the Fraser Institute’s Economic Freedom.

An opposing opinion, Thad Kousser, a lead researcher of the survey released in July 2021 and chair of the political science department at UC San Diego, said “despite the popular notion of unhappy California leaving the state en masse, our robust research shows there is actually no exodus”. He mentioned that policymakers should focus on Californians who are not optimistic about the state’s future, including those vulnerable sectors facing higher housing costs.

The survey’s results show that Californians believe in California as a land of opportunities, where those planning to leave the state remain stable around 23% (in 2019 it was 24%). The survey results documented that the group most satisfied with the direction of the state are the most affluent Californians. They are likely to believe that it will be a better place in the future than today. Those answers are in line with the research about migration patterns of California’s millionaires for 20 years. The authors show that there has been no flight of millionaires away from California despite considerable tax increases levied on the top earners. In addition to that, Cristobal Young, a sociology professor from Cornell University, presents two essential facts about venture capital investments in California: i) in the first quarter of 2021, California’s share of venture capital accounted for 48% of all VC funding in the USA, and ii) between 1995 and 2005, Texas attracted only 6% of all VC funding in the USA.

Both opposing groups have valid points to argue whether the Californian exodus is real. However, there is the undeniable fact that people and businesses are leaving California, motivated by internal and external factors, some of which policymakers arguably should address. It should be noted that some of the studies cited above use data from a couple of years ago, and do not consider the most up-to-date data.

There are some caveats. To address the departure of residents from California adequately, policy makers need to: i) identify who are those people moving out from California (by income level, education, industry, among others features) to have a better understanding of their actual motivations to leave the golden state; and ii) measure the effect of taxes on migration flows to determine the impact of tax rates applied on others states that may influence individual and businesses decisions. Future research should incorporate all the potential motivations for individuals and businesses that might affect their decision to stay or leave in California. That would be useful in implementing better tax systems, fiscal policies, migration policies, and business incentives within states.

Finally, if you are interested in more commentary on what has been happening in California, check out this video clip of Adept Director Gene Tunny’s interview with Dan Mitchell, Chairman of the Center for Freedom and Prosperity:

Published on 16 February 2022. This article was prepared by Adept Research Assistant Arturo Espinoza and Adept Director Gene Tunny. For further information please get in touch with us via contact@adepteconomics.com.au or call us on 1300 169 870..

^[i] GDP for California (Source: Bureau of Economic Analysis).

https://apps.bea.gov/itable/iTable.cfm?ReqID=70&step=1&acrdn=1

GDP for France ($2624.42 billion) and UK ($ 2709.68 billion) in 2020 (Source: IMF)

https://www.imf.org/en/Publications/WEO/weo-database/2021/October/select-country-group

^[ii] https://www.hoover.org/sites/default/files/research/docs/21117-ohanian-vranich.pdf

^[iii] https://www.universityofcalifornia.edu/press-room/uc-studies-contrary-popular-belief-residents-are-not-fleeing-california

^[iv] https://www.dailymail.co.uk/news/article-10318405/The-not-Golden-State-58-California-counties-drop-people-moving-there.html

^[v] https://danieljmitchell.wordpress.com/2022/01/12/california-and-economic-suicide/