California has experienced negative domestic migration in recent years. The increase in the number of residents moving out of the Golden State to other places in the United States is often blamed on California’s high personal income taxes. In fact, this was one of the main arguments waged against the recently enacted Proposition 30, which raised the statewide income tax rate as a way to address the state’s fiscal woes. However, data from the U.S. Census Bureau show that the perceived connection between out-migrants and the state’s income tax is likely overblown. Statistics on the characteristics of California’s inbound and outbound migrants suggest that the patterns in domestic migration over the past decade are more related to housing costs in the state than to the local income tax structure.
As tantalizing as some of the anecdotal evidence is about how income tax rates negatively affect the quality of life of high-income earners, motivating them to leave, the data on individual migration reveals a far more complex picture. While many states have indeed seen an inflow of former California residents, California has also continued to attract residents from the rest of the United States. And in many cases, the residents who migrate in are the highly-educated, high-income (and high taxed) individuals who work in sectors like Information or Professional Services – industries that helped drive the above-average growth California enjoyed prior to the Great Recession.
According to the American Community Survey, California experienced a negative net domestic migration of just over 35,000 in 2011. In other words, 35,000 more people moved out of California to other states than moved in to California from other states that year. Virtually all of the out-migrants went to just 9 states, 5 of which have either no individual income tax or have a flat personal tax rate, and Oregon which has no general sales and use tax. The other two destination states, Virginia and North Carolina, are in the midst of a new energy boom due to the shale-gas industry. This data would seem to lend credence to economist Arthur Laffer’s claim that California really does have a “business-killing tax regime.” That is, if the story ended there.
The fuller reality is that despite out-migration to these states, California was a net importer of residents from more than 15 states in 2011 including Michigan, Illinois, Alaska, Florida, Georgia, South Carolina, Missouri, Maine, New Jersey, Hawaii, New York, Rhode Island, Connecticut, West Virginia, Indiana, and Kentucky. Five of these states have either no personal income tax (Alaska and Florida), or have a flat personal tax rate (Michigan, Illinois, and Indiana). Clearly taxes can’t be the whole story or we would see a clear delineation of out-migration to flat or no income tax states. Instead, California both loses and gains people to and from these states.
What’s going on? While California does have a relatively high and relatively more progressive income tax rate, the more fundamental driver of out-migration are housing costs. For years, Beacon Economics has argued that California suffers from a chronic undersupply of housing, and that the state’s regulatory climate and development and permitting processes are partly responsible for restraining new supply. Although home to more than 12% of the nation’s population, California has consistently accounted for less residential permitting than that for almost twenty years. The lack of supply has disproportionately driven up the cost of housing in California. Beacon Economics’ Founding Partner noted in a recent op-ed that 7 of the 10 least-affordable housing markets in the nation are located in California.
High housing costs have made California an increasingly difficult place for lower income residents with less education to maintain their quality of life, while those with higher education and who work in high-wage occupations, continue to find the state an attractive place to live.
To illustrate, in 2011, California residents with less than a high school diploma had the largest propensity for out-migration, with twice as many leaving the state as migrating in. Nearly 17,200 high-school dropouts moved out of California between 2010 and 2011, while only 8,750 moved in from other states. The next most likely groups to move out were migrants with some college, followed by those with a high school diploma. On the other hand, migrants with either a bachelor’s degree or a graduate/professional degree were more likely to move into California than they were to move out of California to other states. In total, more than 85,000 college graduates moved into the state, while 82,000 moved out.
Individuals coming to California are primarily concentrated in high-wage occupations, which enable them to better absorb the state’s high housing costs and cost of living. Specifically, nearly 50,000 Healthcare Practitioners, Business/Financial Workers, Managers, and Scientists moved into California in 2011. These are all occupations that experienced larger number of workers coming to California than moving out. On the other hand, workers in occupations typically associated with lower wages including Personal Care workers, Healthcare Support, Production, and Food Prep./Serving workers, were some of the most prone to out-migration.
These occupational patterns are in line with high housing costs, but not with the income tax argument. Because California is a relatively progressive tax state, increases in the income tax burden are less likely to affect workers in low-paid occupations than those in higher wage jobs. Still, lower-wage workers left the state in greater numbers while there was an influx of higher-wage workers.
Ultimately, the choice of where to live is one of consumption and reflects a variety of preference factors. Based on the data, it appears that despite a high cost of living, individuals who can afford to live in California will, because of all the state has to offer. This certainly does not imply that we shouldn’t work to make California a better place for all residents, but the data suggests that it might be more effective to focus on housing costs rather than personal income tax rates.
This also does not mean that California’s business climate is fine the way it is; there are clearly industries and occupations (e.g. manufacturing and construction) that are more affected by California’s tax and regulatory environment than others. Rather, the argument is that, like every other state in the nation, California has its strengths and weaknesses, and plenty of room for improvement. The state’s permitting rules and its building regulatory environment could be eased and streamlined to address California’s real enemy: the high cost of housing. But, “business friendliness” also hinges on access to a highly skilled workforce, the ability to get products to market both domestically and abroad, a culture of innovation and entrepreneurship, and the pleasure of having an idyllic climate and a place where people still want to live. These are all areas where California still reigns supreme.