Californians face a difficult economic year in 2024. The state budget deficit will soar to a record $68 billion. Taxes are rising not just from 13.3 percent to 14.4 percent of income for millionaires, but from 9.3 percent to 10.4 percent for the middle class. And prices of goods and services will rise due to the minimum wage increasing from $15.5 an hour to $16 for most workers. Plus the jump will be even higher, to $20 for most fast-food workers and $21 for health-care employees.
- Texas: 4.3 percent
- Florida: 4.1 percent
- Nevada: 3.8 percent
- California: 0.9 percent
Advanced Industry Jobs Declining
California remains the high-tech center of the world. But that’s eroding. Advanced Industry jobs pay two to three times the state average. “This is extremely important because, to a great extent, California and Sacramento have relied on Silicon Valley in terms of tax revenues,” he said, as well as high-tech jobs in Sacramento, Los Angeles, Orange, and Riverside counties. But jobs in this area have dropped from 20 percent of the U.S. total in 2019 to 19 percent in 2023. And look at trendline No. 4 at the right of this chart:
I would add this. The previous decline, shown as trendline No. 2 at the left, was caused by the Great Recession hitting California much harder than other states. Then the long rise in the middle, trendline No. 3, occurred with the boom in such social media as Facebook and Twitter, as well as Apple’s incredible gains from the iPhone’s dominance.
The Chapman Forecast also looked at Advanced Industry Jobs in the 15 states with the lowest tax rates and found they grew from 25 percent of such jobs nationally in 2005 to 30.5 percent in 2023. By contrast, California’s percentage was flat 19 percent at the beginning and end.
Exodus Continues
Mr. Doti said the recent decline in the state’s population is continuing, with net migration of 1.2 million over the four years from 2019–22. “Just think of the impact that will have on businesses, prosperity, and the economy,” he said. And the people leaving “are higher income, not lower.”
He said the Chapman economists originally thought the exiles mainly included low-income workers seeking better prospects in other states. But, “It turns out it’s the higher-income people leaving.” Based on new IRS data for Adjusted Gross Income (AGI), 41 percent of the exiles were making $200,000 or more in 2017. But that rose to 69 percent in 2021.
That’s why personal income tax revenues “finally are taking a hit.” The high taxes “are coming home to roost. People are leaving and it’s having a negative effect on revenues of $26 billion in just one year, and that’s huge.” The drop is for fiscal year 2023–24, which began on July 1.
Taxes Leaving With the People
This next section is crucial because it shows what happens when workers leave—and take their tax payments with them to another state. The following graph shows the cumulative effect of “migratory income.” Mr. Doti said taxes are “the explanation for these domestic outflows. And it’s not only counting the number of people, but the income flows.”
Conclusion: Taxing Us Into Exile
I’ve never seen a more clear demonstration of how reducing taxes attracts jobs and businesses, which in turn boosts the tax base; while doing the opposite drives jobs and businesses into exile, cutting the tax base. And I would add this. People and businesses plan for the future. As tax rates continue to rise, we can expect people and their taxes to leave California even faster for states with lower tax rates.There’s also the federal factor. The recent inflation under President Biden and the boost in interest rates by Federal Reserve Board Chairman Jerome Powell have greatly increased costs for businesses and families. One way to survive such increased expenses is to move from a high-tax state such as California to a low-tax state such as Florida, which also enjoys much lower home prices.
Taxes have consequences. Until California politicians realize that, the Golden State exodus will continue.
