How to Shrink a Fortune

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.

Read the rest of this piece at City Journal.

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Joel Kotkin is the author of The Coming of Neo-Feudalism: A Warning to the Global Middle Class. He is the Roger Hobbs Presidential Fellow in Urban Futures at Chapman University and Executive Director for Urban Reform Institute. Learn more at joelkotkin.com and follow him on Twitter @joelkotkin.

Marshall Toplansky is a widely published and award-winning marketing professional and successful entrepreneur. He co-founded KPMG’s data & analytics center of excellence and now teaches and consults corporations on their analytics strategies.

Photo: by Frankie Leon, via Flickr under CC 2.0 License.