For generations, millions have come to California to seek their fortunes, relying on the state's own seemingly limitless fortune in natural resources, favorable climate, and economic opportunity. But now, California's long-standing identity as America's premier innovator, wealth builder and aspirational place is under threat. The state is now projecting a record deficit of US$68 billion [R$ 330 bilhões na cotação atual] in the next fiscal year, thanks to a 25% drop in personal income tax collections in 2023; O Office of Legislative Analysts of the state predicts continued operating deficits through 2028. But California is beset by even more fundamental problems. The state became increasingly uncompetitive and unevenlosing both business and human assets at an alarming rate.
California's economic and fiscal crisis comes as Democratic Party insiders and analysts seek to elevate the state's governor, Gavin Newsom, as the Democratic Party's presidential heir. Washington Democratic commentators like Al Hunt It is Douglas Schoen, see Newsom as preferable to the aging Joe Biden. They seem to ignore economic realities in the Golden State [Estado Dourado, apelido da Califórnia].
During the nationally televised debate with the governor of Florida, Ron DeSantis, Newsom boasted that his state's economy is “flourishing” and leads the nation. “California is second to none,” Newsom declared. “California dominates.” Even the administration's usual supporters, like the Los Angeles Timesfound these claims dubious, because of the increase in unemployment in the state, the decreasing number of well-paying jobs, rising housing costs (no subways in California has housing prices below the national average) and the onerous regulatory regime.
The state is in free demographic fall. O census found that California lost a net total of 1.7 million people to domestic migration between 2016 and 2022. The populations of Los Angeles and Orange counties declined between 2020 and July 2022, according to the census; these counties are even losing foreign-born residentsa trend that began in last decade. Looking to the future, the Financial Department of the state predicts no population growth until 2060 and a reduction of well over a million people for Los Angeles County.
California's tax policies are costing the state both residents and political power. According to latest census datathe population of California decreased by 342,000 between 2021 and 2022. During this period, 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 loss for the Golden State, where maximum rate reaches 13.3%. In 2020, California lost a congressional seat for the first time. If current trends persist, it could lose four or five more until 2030.
What matters is not just how many people leave, but who is fleeing. For years, conventional wisdom held that those leaving were Reagan-era holdovers or poor people lacking the education to make it in the world's most sophisticated economy. The current trend, as a study by the California Public Policy Institute reveals, contradicts this view: the emigration rate of Californians with college degrees has risen sharply since 2019reversing the net inflow trend that has characterized the state since 2011. In comparison, according to an analysis of census data by the demographer William Freyfrom the Brookings Institution, an average of just 175,000 college graduates from other states settle in California each year.
These changes impose economic costs. According to data from the Federal Revenue, analyzed by economic forecaster Jim Doti, the influx of new domestic migrants to California earning $200,000 or more brought an adjusted gross income (AGI) of $7.3 billion in 2018, while the exodus of migrants from California to other states in this range of income constituted
an AGI of US$13 billion. These trends are getting worse; the net exodus of rich and tax-paying people increased to US$9.9 billion in 2019, to US$13.7 billion in 2020 and to US$20.4 billion in 2021.
California faces a significant income gap between those entering the state and those leaving. Many former high-income residents are moving to Florida, which has become one of the top five destinations for emigrant Californians. Statistics show that more older Californiansoften with homes to sell, are likely to move to Florida, where — like Texas, Nevada and Tennessee — residents do not pay personal income tax.
State leaders should see these trends as warning signs, but they don't seem motivated to change their fiscal policies. Longtime observer Dan Walters of the nonpartisan group Cal Matters correctly credits California's deficit to Governor Newsom and the big-spending, one-party legislature's refusal to face reality over the past decade.
Walters added that in the past, “then-Governor Arnold Schwarzenegger and legislative leaders created a committee to suggest remedies,” which “recommended that the state reduce its reliance on income taxes and switch 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 technological and real estate wealth could always fund the welfare state. more expansive. However, as the source of this wealth withdraws in increasing numbers, it is unclear how this current deficit will be remedied: the state's “hard times reserve fund” and special reserves for schools total just $32 billion This amount may seem impressive, but it covers less than half of the current deficit.
Taxes are certainly a factor in California's decline, but a possibly bigger problem is its Kafkaesque regulatory environment. O Mercatus Center [think tank libertário americano, orientado para o livre mercado e sem fins lucrativos] ranks California as having the highest number of regulations that negatively impact business in the country. California's number of regulatory restrictions (about 396,000) is far above other large states such as Texas (about 227,000). This matters in part because, as research found 2021 Chief ExecutiveCEOs rank the regulatory climate among their top concerns when deciding where to locate their businesses.
California's expansive regulatory regime is largely a result of its climate change policies, which helped create the higher energy prices from United States. High electricity costs and draconian regulations have reduced potential employment in key labor-intensive sectors such as logistics, manufacturing and residential construction. This, in turn, as noted by prominent land use lawyer Jennifer Hernandez, functioned as a kind of “green Jim Crow”, greatly reducing opportunities for hard-working minority Californians [Jim Crow era uma lei que segregava negros nos EUA até a década de 1950].
Climate regulations, Hernandez argues, also make homes more expensive. The notorious California Environmental Quality Act (CEQA) requires developers to go through a multi-year public process to evaluate the environmental impact of virtually all new projects. Under CEQA, any party can challenge and appeal an approved outcome for virtually any reason. The effect: halt virtually all major development in the state. The Tejon Ranch project, which would develop more than 50,000 homes in a rural section of Los Angeles County, for example, has been embroiled in legal disputes for more than two decades.
After project leaders made several changes to their master plan, a California judge rejected even its scaled back plan to build a third of these much-needed homes, citing the need to protect the area's biodiversity. Thanks to these and similar policies and court rulings, California has the least affordable housing of any state in the country, according to Demographia, which maintains a long-running database for every major city in the world. Your 2023 rankings identified the real estate markets in Los Angeles, San Jose, San Francisco and San Diego as the four most expensive in the United States.
The litigious and punitive climate allowed by CEQA is partly because companies and developers are looking outside the state, especially when they want to expand operations or build a new project. Joseph Vranich and Lee Ohanian, in a report from Hoover Institution released last year, noted that in 2020, California had just one-seventh the number of company-initiated capital projects as the top state, Texas. Additionally, from 2018 to 2021, 352 California-based companies moved their headquarters out of California.
When companies choose to build outside of California, people and wealth move with them. Although four of the highest-valued technology companies on the planet — Meta, Google, Apple and Nvidia — remain in California, generating enormous wealth, the state has seen a slow but steady erosion of its technological advantage. Chapman University, in partnership with UC Irvine, created an Advanced Industries Index that compares employment rates, company growth and wages in 50 technology-driven industries in metropolitan markets across the country. The resear
chers found that since 2005, California has seen its Job share in the country's advanced industries stagnates. The Golden State has steadily maintained about 19% of the nation's advanced industrial jobs since 2005, while states with lower income taxes have seen their percentage of the country's jobs in advanced industries rise from 25% to 30% in the same period.
These failures reflect poorly on Gavin Newsom's leadership. While East Coast reporters laud him as the next savior of the Democratic Party, Newsom, not surprisingly, finds himself increasingly less popular among California voters. As his claim of a peerless economy rings increasingly hollow, Newsom will likely place greater emphasis on progressive issues such as transsexuality, abortion and Donald Trump. Humility would be a better path. Instead of boasting about his supposed successes, Newsom needs to face the results of his policies and deal with the record deficit that has turned California's very large fortune into a much smaller one.
Marshall Toplansky is the Professor of Innovation at Chapman University, Argyros Faculty of Business and Economics.
Joel Kotkin is a Presidential Fellow in Urbanism at Chapman University and the author, most recently, of “The Coming of Neo-feudalism: A Warning to the Global Middle Class” [“A Chegada do Neo-feudalismo: Um Alerta para a Classe Média Global”].
©2023 City Journal. Published with permission. Original in English: How to Shrink a Fortune
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