California’s headline economic indicators point to continued expansion, but a closer look reveals that the gains are uneven. The strongest evidence of the state’s growth comes from output: California’s real GDP grew at a seasonally adjusted annual rate of 3.7% in the 1st quarter of 2026, exceeding the nation’s 2.1% growth. Official metrics are not yet available, but the state likely outpaced the nation last quarter, and will continue to do so the rest of the year.

Moreover, in the first seven months of 2026, the number of new business applications in California increased 14.7% over the same period in 2025, suggesting strong entrepreneurial activity. However, the number of those business applications that supplied an anticipated date for paying employees declined 14.6%, over the same period.

While providing a payroll date does not guarantee that a business will hire workers, the U.S. Census Bureau finds that such applications are substantially more likely to become businesses that employ people. (1) This suggests a dichotomy where interest in starting a business is high, yet the pipeline of new businesses likely to generate payroll jobs has weakened.

A similar pattern appears in earnings. While nominal wages increased 4.8% statewide compared with a year earlier, employment grew just 1.1%. The gap was particularly pronounced in Silicon Valley, where wages rose 14.3% and employment only 0.6% in San Mateo County, and wages rose 9.0% and employment just 1.2% in Santa Clara County. Investment in artificial intelligence is the obvious potential explanation for this uneven distribution. The California Legislative Analyst’s Office (LAO) has identified AI-related investment and stock-based compensation as contributors to stronger state income-tax receipts. (2)

Even the declining unemployment rate requires a closer look. The good news is that California’s rate fell from 5.5% in August 2025 to 5.1% in August 2026. The bad news is that the number of employed residents declined by 246,700 over that same period. Unemployment fell because the labor force contracted by an even larger 351,100 people. Thus, the lower unemployment rate masks a decline in the number of Californians who are actually employed, rather than reflecting broader job gains. Taken together, business-applications without planned wages, employment growing much slower than wages, and a smaller labor force, point to concentrated gains among fewer workers.

Housing presents yet another divergence — weak transaction activity has brought little relief from high prices. California home sales in the 2nd quarter of 2026 were 29% below where they were in the same quarter of 2019, while the median price of an existing single-family home reached approximately $875,000 this past July. The nominal price was 48% above where it stood in July 2019, but inflation accounts for much of that increase. Expressed in July 2026 dollars, the July 2019 median was approximately $771,000, meaning the real price increase was about 13.6%. Annual nominal price growth has slowed to just 0.3%, but real prices remain meaningfully above their pre-pandemic level even as transaction activity has fallen sharply. Reduced turnover can also restrict mobility, making it more difficult for workers to move closer to employment opportunities and for employers to recruit from outside their immediate area.

There are some encouraging signs on the supply side. Compared with the same period in 2025, multifamily permits increased 34% from January through July 2026. Recent laws aimed at streamlining multifamily and urban development could be contributing to this increase, but more time is needed to see if these permits actually translate into construction. 

This also relates to some of November’s ballot propositions. Generally speaking, measures that expand housing supply help bring the cost of homes down. On the other hand, when the government provides home buying subsidies, it tends to increase prices overall because it injects more money into the housing markets. Some of the questions voters will face are about who receives assistance and whether or not the proposed spending and regulatory changes will expand housing availability.

November’s Housing Related Propositions

Proposition 1: Housing-Affordability Bond

Summary: Proposition 1 would authorize $11.25 billion in bonds for affordable rental housing, homeownership assistance, infrastructure, farmworker and student housing, tribal programs, and veterans’ home loans. The LAO estimates that it could assist approximately 43,700 rental units or student beds and 40,000 homebuyers. Repaying the General Fund-supported bonds would cost $500 million to $600 million annually for roughly 25 years.

Economic Considerations: Proposition 1 would provide additional housing funding, but it does not directly address California’s unusually high cost of converting public dollars into new homes. RAND found that publicly subsidized apartments in California cost approximately $662 per rentable square foot, compared with $260 in Colorado and $238 in Texas. (3) Longer timelines, development fees, prevailing-wage requirements, and prescriptive design and funding rules all contribute to the difference. Consequently, the bond could finance worthwhile housing while producing relatively few net new units, and requiring decades of debt-service payments. Its economic case would be stronger if the funding were paired with improving affordable housing policy, such as reduced regulation, simplified financing, and faster approvals.

Proposition 37: Middle-Income Homebuyer Loans

Summary: Proposition 37 would authorize as much as $25 billion in revenue bonds to help qualifying middle-income residents purchase newly constructed homes. The program could finance up to 17% of the purchase price, with borrowers contributing at least 3%. Homeowner payments would repay the bonds, producing no expected direct cost to the state.

Economic Considerations: Buyer assistance can raise prices when it increases purchasing power faster than builders add homes. Research on Britain’s ‘Help to Buy’ program found that assistance increased prices in supply-constrained London. (4) Restricting Proposition 37 to new homes improves its design, but does not eliminate this risk. California’s recent increase in permits, alongside a decline in apartments under construction, underscores the uncertainty. Success should be measured by the additional homes produced, not the loans issued. 

Proposition 40: One-Time Billionaire Wealth Tax 

Summary: Proposition 40 would impose a one-time tax equal to 5% of the net worth of people who were California residents on January 1, 2026 and had more than $1 billion in wealth. It would generate an estimated tens of billions of dollars, primarily for health care.

Economic Considerations: The measure could produce substantial near-term revenue, but the fiscal benefit depends heavily on taxpayer migration and the valuation of privately held assets. A Stanford University working paper estimates that the tax would collect approximately $40 billion, less than half the proponents’ estimate. (5) After accounting for the future income-tax revenue lost when billionaires leave California, the same study estimates a net fiscal effect of negative $24.7 billion and finds a negative result in 71% of its simulations. These results depend on assumptions about residency, migration and future tax payments but nevertheless, highlight the central risk: California would exchange a temporary revenue gain for potentially permanent losses from one of its largest taxpaying groups.

It is worth noting that when the City of Los Angeles implemented Measure ULA, the so called “Mansion Tax”, it raised approximately three times less then expected – and taxing property transactions is a much more straightforward process than taxing wealth. 

Proposition 42: Prohibition on New Wealth and Personal-Property Taxes

Summary: Proposition 42 would prohibit new taxes on the ownership of financial assets and other personal property and restrict retroactive tax increases. It would not reduce an existing general wealth tax because California does not currently impose one. If it receives more votes than Proposition 40, it could prevent that measure from taking effect.

Economic Considerations: The measure could improve tax certainty and reduce the perceived risk of holding assets or maintaining residency in California. Its cost is reduced fiscal flexibility because it would constitutionally eliminate a future revenue option. The economic effect therefore depends largely on whether California would otherwise adopt such a tax. Its most immediate consequence would be its potential conflict with Proposition 40.

Proposition 3: Permanent High-Income Tax Rates

Summary: Proposition 3 would make permanent the higher income-tax rates that currently apply to approximately the top 2% of California taxpayers. Otherwise, these rates will expire after 2030. The measure is expected to preserve between $5 billion and $15 billion in annual revenue for education, health care, reserves, and other state programs.

Economic Considerations: High earners exhibit behavioral responses to tax increases through income timing, tax planning, and migration, though these responses do not fully offset revenue gains. A primary concern is revenue volatility. The top 2% already generate roughly half of California’s personal-income tax receipts, making the state’s tax base concentrated among cyclical earners. While Proposition 3 would not increase volatility relative to current levels, it would institutionalize dependence on this volatile revenue stream.

Proposition 2: Expansion of the State Rainy-Day Fund

Summary: Proposition 2 would increase the maximum size of California’s rainy-day fund from 10% to 20% of General Fund tax revenue, require larger deposits during capital-gains surges, and extend supplemental debt payments through 2040. It would also exclude certain reserve deposits from the state appropriations limit until the money is withdrawn.

Economic Considerations: California has a particularly strong case for larger reserves. Personal income tax supplies most General Fund revenue in the state, and collections are heavily influenced by high-income taxpayers whose capital gains and stock-based compensation fluctuate with financial markets and the technology sector. The LAO estimates that revenue losses during a severe recession or market decline can equal 50% or more of annual General Fund revenue. Its simulations indicate that current reserves would cover only about 30% of projected funding shortfalls, compared with approximately 50% under Proposition 2’s approach. (6) Larger reserves would allow California to save more of the temporary revenue generated during stock-market and technology booms, reducing the need for abrupt spending cuts, tax increases, or borrowing when conditions reverse. Although this means less spending during strong years, that restraint is the principal economic benefit of the measure. 

Conclusion

California’s economy continues to expand, but the headline numbers mask an increasingly uneven picture. Strong output growth, rising wages, and a surge in business applications coexist with sluggish job creation, a shrinking labor force, and a housing market where affordability remains strained despite weak sales. At the same time, California’s heavy reliance on high-income taxpayers leaves state finances unusually sensitive to financial-market swings. The choices before voters this November—on housing, taxes, and fiscal reserves—therefore come at an important moment: the state is still growing, but the durability and breadth of that growth will depend in part on whether policy addresses the structural constraints beneath the topline numbers.

Footnotes

1. U.S. Census Bureau, Business Formation Statistics: Methodology, “High-Propensity Business Applications” and “Business Applications with Planned Wages,” accessed September 23, 2026, https://www.census.gov/econ/bfs/technicaldocumentation/methodology.html.

2. Legislative Analyst’s Office. (2025, November 19). The 2026–27 budget: California’s fiscal outlook. State of California. https://lao.ca.gov/Publications/Report/5091

3. Ward, J. M., & Schlake, L. (2025). The high cost of producing multifamily housing in California: Evidence and policy recommendations. RAND Corporation. https://doi.org/10.7249/RRA3743-1

4. Carozzi, F., Hilber, C. A. L., & Yu, X. (2020). On the economic impacts of mortgage credit expansion policies: Evidence from Help to Buy (CEP Discussion Paper No. 1681). Centre for Economic Performance, London School of Economics and Political Science.

5. Jaros, B., Rauh, J. D., Kearney, G., Doran, J., & Cosso, M. (2026). The net present value of the Billionaire Tax Act: An assessment of the fiscal effects of California’s proposed wealth tax. Hoover Institution. https://doi.org/10.2139/ssrn.6340778

6. Legislative Analyst’s Office. (2026, February 18). Revenue volatility and California’s reserve policy [Presentation to the Senate Committee on Budget and Fiscal Review]. https://lao.ca.gov/handouts/state_admin/2026/Revenue-Volatility-and-CA-Reserve-Policy-021826.pdf