Manhattan Institute for Policy Research.
search  
 
Subscribe   Subscribe   MI on Facebook Find us on Twitter Find us on Instagram      
 
 
   
 
   
 


Civic
Report

No. 71 September 2012


THE GREAT CALIFORNIA EXODUS:

A Closer Look

Tom Gray & Robert Scardamalia


Executive Summary

EMAIL THIS | PRINTER FRIENDLY

DOWNLOAD PDF
PRESS RELEASE

PODCAST

OP-ED
California's New Migrants Following the Work, Tom Gray, Union-Tribune San Diego, 10-7-12
Toxic State Syndrome: As California Declines, Texas Rises, Tom Gray, The Daily Beast, 9-30-12
Jerry Brown's tax-hike hail mary, Ben Boychuk, New York Post, 10-1-12
IN THE NEWS
Business flight ignites political battle, Union-Tribune San Diego, 2-8-14
Jerry Brown's Logic, The Wall Street Journal, 11-8-13
Where have all the children gone?, Stockton Record, 3-11-13
California is back — or so we're told, Orange County Register, 2-28-13
Despite Prop. 30, CA Revenues Could Could Come Up Short, FoxandHoundsdaily.com, 2-5-13
California vs. Texas, Columbia Basin Herald, 2-1-13
Golfers' tax avoidance; California levy on millionaires drives away success, Editorial, The Washington Times, 1-28-13
California's Demographic Dilemma: Where Are The Kids?, Editorial, Investor's Business Daily, 1-18-13
NYT: Time to Start Looking to California for Solutions, NRO's "The Corner", January 10, 2013
California dreamin' in Gruesome Gulch, a view from bottom of 'fiscal cliff', The Washington Times, 1-1-13
New tax increases in California stir debate about adding to exodus, FoxNews.com, 12-22-12
Bust: California named worst-run state in the nation, HotAir.com, 11-29-12
4 lessons from the California exodus, Oregon Business News, 10-25-12
NEW: The evidence still shows California exodus, CalWatchdog.com, 10-24-12
Taxes aren't going to make the rich leave California, report says, Los Angeles Times' "PolitiCal", 10-24-12
Viewpoints: Prop. 30 would hurt state's economic prospects, The Sacramento Bee, 10-6-12
Top Destination States for Jobs, CNBC.com, 10-17-12
California Businesses Are Wimps on High Taxes, BloombergView, 10-16-12
A Modest Proposal, Townhall.com, 10-10-12
Welfare for Hollywood, The Wall Street Journal, 10-6-12
California, here we stay, Los Angeles Daily News, 10-6-12
California Takes 'Business for Granted' -- and It's Leaving, Newsmax.com, 10-6-12
Maybe California's just full, Record-Searchlight, 10-3-12
Californians flee so Brown offers perks for illegals, New York Post, 10-1-12
The Decline of the West, PublicSectorInc.org, 10-1-12
NEW: Crazifornia exodus: People fleeing dense cities, regulations, CalWatchdog, 10-1-12
Who's leaving the state, and why, Orange County Register, 10-1-12
Jerry Brown's Vetoes and the Limits of Progressivism, Reason, 10-1-12
People are fleeing our state, Appeal-Democrat, 9-30-12
Hundreds of Thousands Flee Democrat-Run California, Breitbart.com's "Big Government", 9-29-12
The Great California Exodus, California Political Review, 9-29-12
Linked on RealClearPolicy.com, 9-29-12
California's Failed Policies Are Driving Away Businesses and Residents, Reason, 9-28-12
Linked on Heritage Insider, 9-28-12
NEW: Study confirms exodus from Golden State, CalWatchdog, 9-27-12
The Great California Exodus: A Closer Look, FoxandHounds, 9-26-12
Dangerous Division, Thomasville Times-Enterprise, 9-26-12
The Great California Exodus: More Californians Packing Their Bags?, CaliforniaCityNews.org, 9-26-12
How many Californians have come to Idaho? A new report offers an answer, The Idaho Statesman, 9-26-12
Businesses, residents continue to flee California for other states, Los Angeles Daily News, 9-26-12
REPORT: Businesses, residents continue to flee California for other states, Contra Costa Times, 9-26-12
The Great California Exodus: A Closer Look, FoxandHounds, 9-26-12
Linked on Flashreport.com, 9-26-12
The Great California Exodus: More Californians Packing Their Bags?, CaliforniaCityNews.org, 9-26-12
Residents continue to flee California for other states, The Willits News, 9-25-12
Exodus fueled by high costs, regulations, San Gabriel Valley Tribune, 9-25-12
Report: Oregon No. 4 destination for ex-Californians, The Oregonian, 9-25-12
Just Like Cali, The Arizona Republic's "Cactus Juice" politics blog, 9-25-12
George Chamberlin's Money in the Morning, San Diego Daily Transcript, 9-25-12
10 states stealing California's population, WSJ's MarketWatch.com, 9-24-12
New Report: Exodus from California Due Partially to (Gasp) High Taxes, Unfriendly Business Environment, State Capital News, 9-24-12
Californians flee for better-run states, study finds, FoxNews.com, 9-24-12
Linked on DrudgeReport.com, 9-24-12
California tax fight could go either way -- and Oregon may be beneficiary no matter the result, The Oregonian, 9-20-12
RADIO
KSFO's "The Morning Show with Brian Sussman," 10-2-12
KION's "The Mark Carbonaro Show," 9-28-12
KEX 1190 AM's "The Morning Update with Paul Linnman," 9-27-12
KABC Radio "The Doug McIntyre Show," 9-27-12
KXL 101 FM's "Portland's Morning News," 9-27-12
KUHL's "The Andy Caldwell Show," 9-27-12
KABC Radio "The Doug McIntyre Show," 9-27-12
KFI 640 AM's "The John and Ken Show," 9-26-12
Radio America's "The Roger Hedgecock Show," 9-25-12
KPCC (NPR) 89.3's "Air Talk with Larry Mantle," 9-25-12
TELEVISION
CNBC's "Squawk on the Street" interviewed Tom Gray, 10-10-12
Fox Business Network's "Tom Sullivan Show" interviewed Steven Malanga, 10-7-12
Newsmax TV interviewed Tom Gray, 10-6-12
WSJ's "Opinion Journal", 9-27-12
Table of Contents:
Executive Summary
About the Authors
Introduction
Setting the Scene
PART I: Where Californians Are Moving: IRS Data
PART II: Why Californians Are Moving: Analyzing the Data
Individuals’ Reasons to Leave California
Conclusion
Appendix

For decades after World War II, California was a destination for Americans in search of a better life. In many people’s minds, it was the state with more jobs, more space, more sunlight, and more opportunity. They voted with their feet, and California grew spectacularly (its population increased by 137 percent between 1960 and 2010). However, this golden age of migration into the state is over. For the past two decades, California has been sending more people to other American states than it receives from them. Since 1990, the state has lost nearly 3.4 million residents through this migration.

This study describes the great ongoing California exodus, using data from the Census, the Internal Revenue Service, the state’s Department of Finance, the Bureau of Labor Statistics, the Federal Housing Finance Agency, and other sources. We map in detail where in California the migrants come from, and where they go when they leave the state. We then analyze the data to determine the likely causes of California’s decline and the lessons that its decline holds for other states.

The data show a pattern of movement over the past decade from California mainly to states in the western and southern U.S.: Texas, Nevada, and Arizona, in that order, are the top magnet states. Oregon, Washington, Colorado, Idaho, and Utah follow. Rounding out the top ten are two southern states: Georgia and South Carolina.

A finer-grained regional analysis reveals that the main current of migration out of California in the past decade has flowed eastward across the Colorado River, reversing the storied passages of the Dust Bowl era. Southern California had about 55 percent of the state’s population in 2000 but accounted for about 65 percent of the net out-migration in the decade that followed. More than 70 percent of the state’s net migration to Texas came from California’s south.

What has caused California’s transformation from a “pull in” to a “push out” state? The data have revealed several crucial drivers. One is chronic economic adversity (in most years, California unemployment is above the national average). Another is density: the Los Angeles and Orange County region now has a population density of 6,999.3 per square mile—well ahead of New York or Chicago. Dense coastal areas are a source of internal migration, as people seek more space in California’s interior, as well as migration to other states. A third factor is state and local governments’ constant fiscal instability, which sends at least two discouraging messages to businesses and individuals. One is that they cannot count on state and local governments to provide essential services—much less, tax breaks or other incentives. Second, chronically out-of-balance budgets can be seen as tax hikes waiting to happen.

The data also reveal the motives that drive individuals and businesses to leave California. One of these, of course, is work. States with low unemployment rates, such as Texas, are drawing people from California, whose rate is above the national average. Taxation also appears to be a factor, especially as it contributes to the business climate and, in turn, jobs. Most of the destination states favored by Californians have lower taxes. States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are prompting businesses to locate outside California, thus helping to drive the exodus.

Population change, along with the migration patterns that shape it, are important indicators of fiscal and political health. Migration choices reveal an important truth: some states understand how to get richer, while others seem to have lost the touch. California is a state in the latter group, but it can be put back on track. All it takes is the political will.

About the Authors

TOM GRAY is an award-winning editor, writer, and communications consultant whose work has covered a wide range of fields, including investor relations, personal finance, health care, engineering, leading-edge scientific research, and local, state, and national politics. In a career spanning four decades, he has written for publications such as the Los Angeles Times, City Journal, and Investor’s Business Daily (where he also served as senior editor), and has authored three books on online investing published by John Wiley & Sons. As editorial-page editor of the Los Angeles Daily News, Gray won a number of awards for writing and editing including first place awards for editorial writing from the California Newspaper Publishers Association and the Inland Daily Press Association. He also has provided marketing and communications services for business and not-for-profit clients including Deloitte & Touche, ValueOptions Inc., the Kavli Foundation, the Synthetic Biology Institute at the University of California, Berkeley, and the University of California, Santa Barbara. A graduate with distinction from Stanford University, Gray also has master’s degrees in English and business administration. He lives in Cambria, California.

ROBERT SCARDAMALIA is president of RLS Demographics, Inc., a firm specializing in the use and analysis of economic and demographic data for private and public applications, and a data consultant for the Manhattan Institute’s Empire Center for New York State Policy. He was formerly director of the Center for Research and Information Analysis in the New York State Department of Economic Development and served as chief demographer of the State of New York and director of the State Data Center. Scardamalia is a professional demographer and has more than 30 years of experience using Census and related data for marketing, business attraction, and public sector program management. He holds a bachelor’s degree in sociology from Penn State University and a master’s degree in demography from Georgetown University.

Introduction

California was once a powerful draw for Americans on the move—a golden land, “west of the west,” in Theodore Roosevelt’s famous phrase, where everything could be better. But that California is no more. Around 1990, after decades of spectacular postwar growth, California began sending more people to other states than it got in return. Since that shift, its population has continued to grow (at a rate near the national average) only because of foreign immigration and a relatively high birthrate. Immigration from other nations, though, is declining, and it is likely that the state’s growth rate may soon fall behind that of the U.S. as a whole. As a magnet of opportunity, the state now pushes out where it once pulled in.

What are the reasons for this exodus, and what do they tell us about how American states thrive or decline? To understand how California the cherished destination turned into California the place to escape, this study examined data from a number of different sources that have tracked the great exodus of the past 20 years. We draw on the most recent data available from the Census, the Internal Revenue Service, the state’s Department of Finance, the Bureau of Labor Statistics, the Federal Housing Finance Agency, and other sources. We have been able to use these sources to describe the exodus in unprecedented detail, revealing its drivers and suggesting things that other states can learn from California’s continuing decline.

Setting the Scene

California is a far more populous state than it was in 1960, when it was second to New York in population size, with 15,717,204 people. Since then, the state has grown 137 percent, to 37,253,956 in 2010. For comparison, consider New York, which grew by only 15 percent during that same period. On the other hand, Texas has grown faster over these 50 years—by 262 percent. As we’ll see below, though, it’s significant that Texas’s record reflects a recent sprint. Until 2000, its growth matched California’s rather than surpassing it.

Since the watershed year of 1990, California’s growth rate has slowed, and is now near the average for the United States as a whole. Moreover, the nature of Californian growth has changed. From 1960 to 1990, more than half of its population increase—54 percent, according to state Department of Finance estimates—was due to migration from other states or foreign countries. In this heyday of California’s desirability to migrants, net domestic migration from within the U.S. alone totaled more than 4.2 million, or 30 percent of the overall growth. So in 30 years, California took in enough American migrants to populate the entire state of Missouri.

But then, as we have described, the appeal of California withered. Since 1990, domestic migration to California has flipped to a deficit. In the last two decades, the state lost nearly 3.4 million residents through migration to other states. In other words, it lost about four-fifths of what it had gained through domestic migration in the previous 30 years. Foreign immigration filled the gap only partially. Inflows from overseas peaked at 291,191 in 2002 and sank to just 164,445 in 2011. Meanwhile, net domestic out-migration has averaged 225,000 a year over the past ten years.

In 2005, foreign immigration ceased to make up for the drop in domestic migration to California. Since that year, California’s annual net migration has been negative—more people leave the state than come to live in it. Natural increase in the resident population—births minus deaths—cushions the blow of this out-migration, but that, too, is falling. It peaked at 397,000 in 1992 and had dropped to 271,000 by 2011. With continued low levels of fertility and the aging of the baby boomers, natural increase will continue to decline and, in some areas, may already have shifted to a natural decrease. If all these trends continue, California may find itself in a situation similar to that of New York and the states of the midwestern Rust Belt in the last century, which have seen populations stagnate for decades, or even fall.

Who were the big winners in the migration game when California was losing? The answer is the same for both decades since 1990—the Sun Belt giants Florida and Texas, followed by other fast-growing southern and western states. Migration overall declined somewhat from the 1990s to the 2000s, possibly reflecting the more troubled economy of the second decade, especially at its end.

The states with the largest net in-migrations generally had their biggest gains in the 1990s, though they all continued to attract Americans in the 2000s. Among the big losers, California (like number-two loser New York) shed residents at a consistently high pace for the whole 20 years. Most other big “sender states,” such as Illinois, New Jersey, Ohio, and especially Michigan, saw their out-migration accelerate in the 2000s.

In the period we studied, California’s out-migration was also high as a percentage of its population—6.11 percent in the 1990s and 5.8 percent in the 2000s. Just a handful of states had less success at keeping their residents. In the 2000s, for instance, only New York (8.27 percent), Michigan (7.12 percent), Illinois (7.09 percent), and New Jersey (5.86 percent) had higher out-migration rates. As that list suggests, California’s migration patterns now have more in common with large northeastern and Rust Belt states than with other Sun Belt or western states.

California is still contributing to the population boom of the southwestern U.S. but now seems to do so mainly by sending residents to neighboring states. The fastest-growing state in the nation, Nevada, is also the one with its population centers nearest those of California: Las Vegas and Reno are, respectively, just a half-day’s drive from Los Angeles or San Francisco. Arizona is another fast-growing destination state in the California neighborhood.

Part I: Where Californians are Moving: IRS Data

When Californians leave, where do they go? The answer helps point us toward the all-important issue of why people are leaving—and what this says about the state’s future.

To identify favored “target states” for out-migration, the most useful tool is the annual data from the Internal Revenue Service showing how many filers of income-tax returns have moved between two years. Our analysis of these data reveals in some detail the starting points and destinations of those who have left California. It also allows us to make some reasonable inferences about their motives.

This IRS information is not a perfect tool. It leaves out students, low-income persons, the elderly, and others who may not file income-tax returns, and it does not track moves associated with first-time or final filings. For these reasons, it does not produce as high a total for net migration from California as the Census figures do. But the IRS records show migration between specific states, metropolitan areas, and counties (see Appendix). In this study, we have taken advantage of this feature of the data to map the California exodus in detail.

We analyzed IRS migration data on year-to-year periods starting with 2000–01 and ending with 2009–10 (ten years in all). We looked first at migration between California and other states, to see which states are most popular as destinations for Californians and which states continue to send a significant number of residents to the Golden State. Second, we took a finer-grained look at population movements in different regions of the state, to examine more precisely where inside California the migrants came from.

A. Migration from and to California

The IRS data show a pattern of movement over the past decade from California mainly to states in the western and southern United States. Texas, Nevada, and Arizona, in that order, are the top magnet states on the basis of the net migration (measured by tax exemptions) that they drew from California between 2000 to 2010. Oregon, Washington, Colorado, Idaho, and Utah follow. Rounding out the top ten are two southern states, Georgia and South Carolina. On the other hand, the top ten sender states—those that lost more residents to California than they gained—are all in the Northeast or Midwest. New York, Illinois, and New Jersey are the largest in this category, though their deficits with California are far smaller than California’s deficits with its leading destination states.

The IRS data also put a dollar figure on migration patterns. Along with totals for the number of individuals moving between states, the IRS adds up the income reported in the tax returns of migrants. The agency’s data reveal just how much wealth California is losing as a result of its people’s exodus. This is not only a measure of economic damage but also of political and fiscal consequences because the state government depends heavily on personal income tax for its revenue.

The data show aggregate income moving into and out of California in roughly the same pattern that people do. There are some differences because some migrants are wealthier than others, so the movement of dollars does not precisely track that of individuals. For example, while Texas took in the largest number of former Californians between 2000 and 2010, it was Nevada that received the largest share of formerly Californian income: some $5.67 billion in income shifted from California to the Silver State during that decade. Arizona had the next biggest gain at California’s expense, at $4.96 billion, followed by Texas, at $4.07 billion, and Oregon close behind, at $3.85 billion. The lower ranking for Texas is due to Californians moving to Texas having lower annual income per capita ($23,150) than did Texans going to California ($26,640). In the other three states, that income difference is either much narrower or tilted the other way. Inbound and outbound incomes were less than $500 apart in Arizona. In Oregon and Nevada, newcomers from California had incomes about $4,000 higher than those going the opposite way.

The best explanation for these patterns is that relatively affluent retirees (or owners of vacation homes) move from California to Oregon and Nevada, while Texas gets more young families looking for economic opportunity. Arizona has a mix of both types of ex-California migrant. Another type of IRS data, exemptions per return, supports this explanation. Returns of Californians bound for Texas average 2.21 exemptions, compared with 1.89 for those who went to Oregon, 1.98 for Nevada, and 2.07 for Arizona.

The ratios for returns of those moving to California were uniformly lower, ranging from 1.75 for those coming from Oregon to 1.88 for people leaving Texas. Those heading to the Golden State, in other words, tend to have fewer children than those who are leaving, or no children at all, or are singles.

Family needs are not the only influence on decisions that ex-Californians make about where to go. The data also show that simple proximity has an important role. Over the period we studied, the three states adjoining California—Arizona, Nevada, and Oregon—received nearly 24 percent of its migrants (a total of 1,168,134). Migrants to the next tier of states—Washington, Idaho, Utah, and New Mexico—brought the total to 1,798,496, or nearly 36 percent of those who left California for any other part of the United States. Inflows from these seven states totaled 992,093, for a net out-migration of 806,403. So about 65 percent of California’s overall migration deficit involves nearby states.

How much of this movement was related to jobs, and how much to other factors? The IRS does not ask people why they are moving (nor, we suspect, would most citizens wish it to). So we must extrapolate to find a reason that smaller states such as Arizona and, especially, Nevada have grown so much at California’s expense. Retirement may be part of the explanation. Arizona and Nevada are logical nearby retirement destinations, and more Californians are likely to be familiar with them than with more distant retirement meccas such as Florida. Nevada is especially near and has the lower tax burden of the two. Lower taxes, lower costs, and proximity to old haunts can create a powerful incentive. For example, a Bay Area resident who moves to the Reno area will pay lower sales taxes and no state income tax at all, while still living less than four hours by car from San Francisco. Las Vegas is almost as convenient to Los Angeles—less than a five-hour drive. Arizona, another low-tax state, also has popular retirement destinations. Oregon’s attractive retirement options are farther from California’s main population centers, and Oregon’s income-tax burden is similar to California’s. These factors may help explain the greater pull of Arizona and Nevada. (Then too, a Californian could perceive that their second residence could have implications for their tax bill and consider their address in another state as their principal residence. The real effect of this is impossible to know but it may be a factor especially in the Nevada region around Lake Tahoe, which is even closer to San Francisco than Reno.)

B. Migration from the “Californias”

California is a huge, diverse state, divided along a number of real and figurative fault lines. Coastal and inland regions differ in their politics and economic foundations. The North has historically been at odds with the South over political power and water. California is the most urbanized state in the nation, yet it has vast rural regions and deserts that are remote from its cities in attitude as well as distance. So generalizing about migration from California as a whole won’t reveal much about the motives of those who choose to leave. For this study, therefore, we have grouped the state’s counties into 12 distinct “Californias” to give a clearer picture of the exodus. These regions, from south to north, are:

  • San Diego Area: San Diego and Imperial Counties
  • Los Angeles and Orange Counties
  • San Bernardino and Riverside Counties
  • Mid-coastal: the coastal region from Ventura to Santa Cruz County, including San Benito County
  • Central-South: the San Joaquin Valley from Kern County in the South to Madera County in the north, including Inyo County east of the Sierra Nevada
  • Santa Clara County, including San Jose and the heart of Silicon Valley
  • San Francisco Area: the city/county of San Francisco with Marin and San Mateo Counties
  • East Bay: Alameda and Contra Costa Counties
  • Central-North: the Central Valley and Mother Lode from Merced County in the South to Yuba, Sierra, and Colusa Counties in the North; excludes Sacramento County Sacramento County
  • Wine Country: Napa and Sonoma Counties
  • North Country: coastal regions from Mendocino County northward to the Oregon border; northern Sacramento Valley eastward to the Nevada border

The 2000–10 IRS data for these regions show, again, the effect of proximity: Oregon is the most popular destination for those leaving the North Country, as is Nevada for the adjacent Central-North region. The data also reveal patterns of migration within California. For example, San Bernardino and Riverside Counties have seen heavy in-migration in recent years, much of it people leaving the congested Los Angeles–Orange County coastal region. But that movement away from the coast doesn’t stop at the state line. San Bernardino and Riverside Counties have also been a source of considerable migration to points outside California: 13.04 percent of their 2000 population left the state in the 2000s. This was greater than the statewide average out-migration of 10.71 percent. When in-migration from other states is taken into account, the two counties still had net out-migration of 5.08 percent, the highest in California and well above the state average of 3.64 percent. Likewise, the San Diego area was a major source of out-migration, with an outflow rate of 21.21 percent and a net out-migration rate of 4.72 percent. For both these California regions, Texas and Arizona were the leading destinations for migrants. Los Angeles and Orange Counties also accounted for a large share of the state’s exodus.

This means that the main current of migration out of California in the past decade has flowed eastward across the Colorado River, reversing the storied passages of the Dust Bowl era. The three regions that make up SouthernCalifornia—Los Angeles/Orange, Riverside/San Bernardino, and San Diego—had about 55 percent of the state’s population in 2000 but accounted for about 65 percent of the net outmigration in the decade that followed. More than 70 percent of the state’s net migration to Texas came from these areas; 69 percent of migration to Arizona and 60 percent of the net flow to Nevada was from Southern California.

In contrast, regions to the north were more stable. San Francisco, East Bay, and Santa Clara County had net out-migration rates of 1.42 percent, 3.31 percent, and 3.19 percent, respectively, all below the state average. Nevada received the highest net migration from all three areas, but northern migrants’ destinations were more diverse than other Californians’. Washington was the most popular destination state for those leaving San Francisco and its suburbs, while Texas led as a target from the East Bay and Santa Clara County. People in the coastal and interior regions of Northern California were also more inclined than Southern Californians to stay put. In the North Country region, the net migration rate was 1.67 percent, and more than half this flow went to neighboring Oregon. In the mid-state and Sierra Nevada regions (CentralNorth, Central-South, Sacramento, and the Wine Country), all counties had net migration rates below the state average. The only region outside Southern California with above-average net migration was the mid-coastal area, which at its southern end includes the Los Angeles suburbs in Ventura County.

Part II: Why Californians are Moving: Analyzing the Data

People pull up stakes for many reasons, from jobs to family ties to climate. It is impossible to know for certain what motivates any individual decision to leave the state. But millions of individual decisions do form broad social patterns that are clearly related to economic changes. More often than not, people move because there is a better opportunity elsewhere. For an individual, the motivator is often a job. For a company, it is a chance to set up shop where conditions are more conducive to making a profit. The target could be a place with lower taxes and fees, friendlier regulation, better access to markets, or a labor pool with theright skills at the right price. Even retirees’ moves can be indirectly tied to jobs, as when they migrate to be near children who have taken jobs in another state. The push and pull of individual decisions will cause large-scale trends and patterns whose causes and consequences can be analyzed.

A. Economic Adversity

In this study, we have engaged in such an analysis to identify the economic and political triggers of the California exodus that began about two decades ago. Clearly, something happened around that time to change California from a “pull” to a “push” state. What was it? There is no simple answer to that question. But we do know that several trends converged around that time to sap the state’s economic vitality.

One was the recession of 1990. The state’s unemployment rate, which had tracked the U.S. rate closely through most of the 1980s, surpassed the national average after 1990. By 1993, in fact, the California rate was 2.6 percentage points above the country’s overall rate. Whenever California’s unemployment is higher than the U.S. rate, migration into the state tends to fall and out-migration rises. In most years since 1960, California’s unemployment rate has been above the national average. When that gap narrows or closes (and in the few cases when California actually has a lower jobless rate), in-migration has been high. In contrast, when the gap opens, out-migration soars.

The early 1990s were the most dramatic demonstration we know of this effect. In those years, California had a sharp and prolonged recession while the rest of the nation was going through a relatively mild and brief downturn. The state’s hard fall was due in part to its dependence on the defense sector, which had thrived during the Reagan-era arms buildup of the 1980s, and then shriveled with the end of the Cold War. In 1995, the state’s Legislative Analyst’s Office noted that California’s number of aerospace jobs had shrunk from 337,000 in 1990 to 191,000 in 1994. As is to be expected in a recession, construction also took a dive. The number of new residential building permits, which had peaked at nearly 315,000 in 1986, was under 85,000 in 1993 and didn’t exceed 100,000 again until 1997. To put that peak-to-trough drop of 230,000 in perspective, it was greater than the total number of permits issued in any year of the 2000s building boom.

Taxes were also on the rise during the early 1990s, though political signals may have had more impact at the time than the actual dollar amounts. According to Tax Foundation data, the overall state and local tax burden in California rose from 10.0 percent of income in 1988 to 10.6 percent in 1992. California’s increase was not much more than that of the U.S. as a whole (which saw a rise from 9.7 percent to 10.1 percent), but it sent some troubling signals to job-producing businesses. One was that the state government, which had powered through the 1980s without resorting to any broad-based tax hikes, suddenly seemed unable to pay its bills. Another was that the tax revolt that had started with Proposition 13 in 1978 seemed to be out of gas. When the new Republican governor, Pete Wilson, signed off on a $7 billion tax increase in 1991, it was a sign that California’s political leaders had abandoned any notion of trying to spur growth through tax cuts. Wilson’s revenue enhancers were temporary, and, coincidentally or not, the state recovered briskly after they expired in the mid-1990s. But as the state later learned in the 2000s, its fiscal distress was far from over.

Another factor that may have hurt California’s economic competitiveness at the end of the 1980s was that decade’s dramatic spike in real-estate prices. Home values increased in most states during the 1980s, but in California they rose far more. According to Census data, the state’s median home values were consistently above national averages in 1940, 1950, 1960, and 1970 but never by more than 36 percent. By 1980, they were 79 percent higher. By 1990, they were 147 percent higher. This was a boon to those Californians who wanted to cash out on their expensive homes and move to cheaper locales. But for employers looking to fill positions in California, it added to the cost of labor there in comparison with other states. The Texas median home price in 1990, for instance, was less than one-third of California’s.

Looking back on the population surge of the 1980s, it’s easy to see why housing prices soared. They were obeying the law of supply and demand, with a boost from the sharp reduction in property taxes brought about by Proposition 13 (then, as now, property taxes were capped at 1 percent of a home’s purchase price, plus an adjustment of no more than 2 percent per year). During the 1980s, the state gained 6,092,257 residents, and builders struggled to keep up by adding 1,903,841 housing units, or fewer than one for every three new Californians; in the previous decade, the ratio had been one-to-1.6. Added to sheer demand for housing was the fact that California was growing short on buildable land. This was due both to geography and policy. The most desirable parts of the state are near the coast, where land use was becoming increasingly restrictive. Cities and counties imposed growth controls, and more and more land was placed off-limits as permanent public open space or preserved farmland. We recognize that many factors go into the price of homes, so it is impossible to determine how much of the California premium was due to building restrictions, land-use rules, land scarcity, demand for housing, or tax policy. We can only note that all these factors played a role and that their combined effect was to make housing far more costly in California than in most other states.

B. The Density Factor

As California saw its economy struggle, it was also becoming a more crowded state. At some point late in the last century, people moving to California could no longer assume that they would have more living space and less congestion. Despite stereotypes about suburban sprawl, California’s development since at least the 1980s has followed the “smart growth” model of closely packed residential clusters separated by open space. As a result, California had the densest urbanized areas in the nation by 2010. According to the Census, the Los Angeles and Orange County region had a population density of 6,999.3 per square mile—well ahead of famously dense metro areas such as New York and Chicago. In fact, the Los Angeles and Orange County area was first in density among the 200 largest urban areas in the United States. The San Francisco/Oakland area came in second, at 6,266.4; San Jose was third, at 5,820.3. The New York–New Jersey area followed, at 5,318.9, By way of comparison, the Chicago urban area ranks 25th, with a density of 3,524, and Houston is 37th, at 2,978.5. Of the 50 densest large urban areas in the country, 20 are in California.

This crowding takes its toll. California’s great coastal cities may still be exciting places to live, but they are no longer convenient—at least not by the standards of the 1960s and 1970s, when the freeways were new and not yet clogged. The crowding of coastal California was well under way by 1990, reflected not just in housing costs but also by a major migration within the state to roomier (if hotter) inland counties. In part because of this population shift, California is, in some ways, two distinct states: a coastal zone with an entertainment and technology-driven economy and liberal politics; and a more conservative inland region that makes its money from agriculture and, in and near Kern County, oil. One of the big migration stories of the past two decades has been eastward movement into those inland counties, where much of the farmland has given way to homes. Table 2 shows how this internal migration affected counties during the first decade of the 2000s. Among the state’s larger counties, those with the highest out-migration rates (Los Angeles, San Francisco, Alameda, Santa Clara, San Mateo, Monterey, and Orange) are all on or near the coast. Large inland counties such as Kern, Riverside, and Placer had double-digit rates of net in-migration. The same factors that drive this eastward movement, such as the desire for more space and affordable homes, might also be driving much of the migration from California to more spacious neighboring states.

C. The Fiscal Distress Effect

During the late 1990s, thanks to the rise of the dot. com economy, California was thriving again and its government operated with a surplus. The state saw good times in the following decade as well. Massive trade through its harbor helped revive Los Angeles, big new things in technology kept the Bay Area (home of Google and Apple) humming, and homebuilders were back in business everywhere. By mid-decade, the jobless gap with the U.S. average was almost closed.

Despite this upturn, though, people did not flock to California as they had in the past. Instead, the exodus that started around the 1990 recession resumed and showed no signs of stopping. In the 2000s, net domestic out-migration actually rose as the economy grew, peaking at 317,437 in the fiscal year ending June 30, 2006. The exodus rate remained high— still more than 300,000—as the national economy weakened in 2009 and migration in general slowed down. In California’s history, an economic boom had usually been followed by an influx of migrants. What had happened to break that connection?

The public sector’s fiscal instability may have been the culprit. This was not a new problem, but it became more severe and obvious after the turn of the century. California’s volatile tax structure (it depends heavily on corporate profits and income from capital gains) and its inability to restrain spending in high-revenue years made the state government increasingly vulnerable to a recessionary shock. In the early 2000s, that shock arrived.

Even before that blow, the state went through a chaotic period of power shortages and rate spikes due to a botched deregulation scheme. Political upheaval—2003 marked the first and only recall of a sitting governor—muddled the outlook further. By 2003, California’s Standard & Poor’s bond rating was BBB, the worst in the nation, and it was patching together budgets through short-term borrowing and accounting tricks. When recovery arrived in the middle of the decade, it did not resolve the structural imbalances between revenues and spending. So the state was again deep in the red as recession set in later in the decade, and a number of its cities were heading toward bankruptcy. As of 2012, it once again had the lowest S&P rating in the nation: A-, one step above BBB.

Fiscal distress in government sends at least two discouraging messages to businesses and individuals. One is that they cannot count on state and local governments to provide essential services—much less, tax breaks or other incentives. Second, chronically out-of-balance budgets can be seen as tax hikes waiting to happen, with businesses and their owners the likeliest targets to tap for new revenue. For example, the state government’s fiscal troubles have led to an initiative, Proposition 30, on the ballot this November, which asks the state’s voters to approve increases in sales and income taxes. In contrast, a fiscally competent state inspires confidence that it can sustain its services without unpleasant tax surprises. Even when that state’s tax burden is on the high side, it’s at least predictable. Businesses there can forecast their costs with some confidence. California, as its credit status indicates, is now the biggest gamble among the states. It has been that way for most of the past decade. To the degree that fiscal distress sends businesses elsewhere, it does the same with jobs and helps explain the migration data.

Individuals' Reasons to Leave California

I: Jobs

A closer look at movement to and from the top three destination states for Californians— Texas, Nevada, and Arizona—shows the impact of the 2008–09 recession on migration in general. People simply did not move as much because there were fewer jobs to attract them. But even with the recession impelling people to stay put, Texas had a relatively strong pull on Californians. Texas’s net inflow from California between 2009 and 2010 was 14,963. That’s small compared with the population of either state but is impressive in the context of a major economic downturn. According to the IRS data, the next biggest beneficiary in that period for net migration from California was Oregon, at 5,708 net gain, followed by the state of Washington, at 4,741. Arizona and Nevada, the two most popular destination states at the start of the decade, netted only 3,653 between them from California in the decade’s last year. This is consistent with our hypothesis that these states are destinations for retiring Californians, as the economic crisis put retirement plans on hold for many who suffered losses in real estate or the stock market.

Much of the explanation for individual decisions to leave California can be found by considering the changing status of Texas in the data. At the turn of the century, Texas lagged behind Nevada, Arizona, and Oregon as a destination for Californians. In 2010, it had moved to the top of the list. Why did that happen? Unlike nearby states, Texas is not an obvious destination for Californian migrants. Most of its population centers are some 1,000 miles away from the big California metro areas.

What it has had, for the past few years, is an economy that, compared with California’s, is booming. This is a quite recent development. In fact, California and Texas had comparable unemployment rates through 2006 (in the summer and fall of that year, both rates bottomed, at just under 5 percent). But starting in 2007—well before the recession—California’s jobless rate started climbing and eventually left Texas far behind. By July 2010, the gap was 4.3 percentage points: 8.1 percent for Texas and 12.4 percent for California. It is not surprising, then, that Texas kept pulling Californians by the tens of thousands as the decade waned, while nearer destination states saw the earlier wave of Californians slow to a trickle.

Texas is not the only east-of-the-divide state to attract more Californians as the decade wore on. Its smaller neighbor Oklahoma was a minor target state in 2000–01, with net migration from California totaling only 775. Ten years later, it was the sixth-most popular target. It netted 2,152 from California in 2009–10, amid the sluggish migration of the recession. Oklahoma’s job market was stronger than California’s throughout the decade, but the jobless gap between the two states was much wider in 2010 (5.5 percent) than it had been ten years earlier (1.9 percent).

2. Taxes

Most of the destination states favored by Californians havelower taxes. Even Oregon, with income-tax rate like those of California, has a more business-friendly tax code. On the other side of the migration ledger, the states that are still net senders of people to California range from near the middle of the tax scale to the very top. As a general rule, Californians have tended to flee high taxes for low ones.

Whether this is why they move is a matter of debate. With so many factors possibly influencing the decision to migrate, it’s impossible to tease out how much the tax burden matters in each individual’s case. But, as we have noted, individual decisions in the aggregate add up to suggestive patterns. California remains a destination for people moving from high-tax states even as it loses thousands of people every year to lowtax states. This is a highly suggestive pattern.

Even as individual motives are varied and idiosyncratic, we must also note that not all migration is driven by such household choices. Businesses affect migration patterns by their choice of where to relocate or expand. Theirs is largely an economic decision, based on costs as well as access to suppliers and customers. We can say with some confidence that business decisions to leave California are sensitive to its tax code because taxes are a large component of business costs, and no competent business owner will ignore them. Taxes are a significant factor in business migration along with the cost of labor, the skills of the workforce, utility costs, and the time and expense of getting permits.

To explore the tax-migration link, we looked at two types of tax ratings in the destination states for Californian out-migration and the states from which new migrants came to California in 2000– 10. One rating is based on the overall state and local tax burden, computed by the Tax Foundation as a percentage of personal income. The other is the Tax Foundation’s State Business Tax Climate Index. This is given as a score for which the U.S. average is 5.00. The higher the index score, the better the climate. To match these data sets as much as possible to the full-decade migration totals, we averaged tax-burden figures and state ranks for 2000–09 (the latest available), and we chose the State Business Tax Climate Index at mid-decade, for the fiscal year ending in 2006. The top ten target states attracted a net total—the difference between total inflows and outflows—of 1,085,818 Californians over the decade. Texas attracted the most, at 225,111. The top ten source states sent a net total of 152,324 to California, with New York sending the most, at 31,434.

One pattern stands out in these data. With few exceptions, the states that have gained the most at California’s expense (in income as well as people) have decidedly lower tax burdens and better business-tax climates. California’s ranking on both scales is near the high-tax, poor business-climate end, and it scores near the average of the sender states, most of which share its poor marks. The major destination states, on average, do better than California in the rankings, with lower tax burdens and higher business-climate scores.

We have also found another clue suggesting that taxes make a difference in migration: California’s net out-migration to the top destination states was far larger than what it received from the sender states. In other words, with its higher-than-average tax burden, California is competitive only with a few other high-tax states, such as New York and New Jersey. And its burden is too close to the top to leave it any real advantage. The much greater advantage lies with low-tax states such as Texas, which can offer more substantial savings.

3. Other Costs

Employers may be especially sensitive to California’s tax bite because the state’s other business expenses are so high. One 2005 study, by the Los Angeles–based Milken Institute, ranked California fourth-highest in the nation on a broad cost-ofdoing-business index. (The Milken Institute’s last survey of this type, in 2007, used slightly different methodology but put California almost as high, at sixth.) Among other factors, California’s 2005 electricity-cost index was 168.0, on a scale in which 100 was the U.S. average. Industrial rents were 36.8 percent above the national average, and office rents were 36.3 percent higher. The state’s tax-burden index was not as outsize—111.1—but combined with the other factors, it helped push the state to an overall cost index of 124.2.

This index, like other gauges of business cost, leaves out the impact of California’s regulations. These are important factors, even if their impact is hard to measure precisely: quantifying the cost of delays, paperwork, and uncertainty due to unfriendly laws and bureaucrats is not an exact science. Businessclimate surveys by such publications as Forbes and Chief Executiveconsistently rank California near the bottom in the regulation category.

Then, too, most of the states gaining population at California’s expense do not require workers to join a union when their workplace is represented by one. Of the ten top destination states, seven (Texas, Arizona, Utah, Idaho, Nevada, Georgia, and North Carolina) have right-to-work laws that explicitly ban the compulsory union shop.

In sum, we can identify a number of cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—that offer incentives to businesses to locate outside California, thus helping to drive the exodus.

Time will tell if the century’s second decade continues the migration trend of the previous ten years. What seems unlikely to change, though, is California’s poor position relative to other states in the competition for jobs and business expansion. The Tax Foundation’s latest (2012) State Business Tax Climate Index ranks California less favorably than 47 other states. In 2011, the Milken Institute ranked 200 U.S metropolitan areas according to their growth in jobs and wages, and only one California metro area, Bakersfield, made the top 50 (at 46th). The Milken survey also suggests that the past decade’s destination states haven’t lost their appeal. Of the 50 highest-ranked metro areas, 22 were in the top ten destination states, with 11 in Texas alone. Only eight of the top 50 areas were in the top ten sender states. The two biggest senders of migrants to California—New York and Illinois—had no high-growth cities at all.

Another unchanging aspect of the situation is California’s perilous public-sector fiscal health. As we noted above, it currently ranks last on this score among states, as measured by its S&P credit rating. In fact, California was the only state in 2012 with an A rating, six notches below the top rating of AAA. Interestingly, of the ten states that sent the most people to California in the past decade, eight are high-tax jurisdictions—and the only two that are not, Illinois and Michigan, had low credit ratings. (Illinois is rated A+ because of one of the nation’s worst burdens of unfunded pension obligations, and Michigan’s rating declined during the 2000s from AAA to AA- as the auto industry struggled and shed employment.)

Conclusion: Why Migration Matters

In and of themselves, raw population statistics are not of much significance. A small nation (or U.S. state) can be rich in per-capita terms, which is what matters to its residents. And a large one can be poor. When a U.S. state’s population growth slows or stops entirely, it suffers some direct but limited losses. Its share of the electoral college and the House of Representatives shrinks, and it loses some bragging rights. Otherwise, many people don’t feel the impact of migration within the United States.

But population change, along with the migration patterns that shape it, are important indicators of fiscal and political health. Migration choices reveal an important truth: some states understand how to get richer, while others seem to have lost the touch. People will follow economic opportunity. The theme is clear in the data: states that provide the most opportunity draw the most people.

California has an opportunity deficit that shows up in its employment data and its migration statistics. We can understand the nature of that deficit clearly when we compare the Golden State with those that lure its residents away. In such a comparison, as we have seen, one fact leaps out: living and doing business in California are more expensive than in the states that draw Californians to migrate. Taxes are not the only reason for this, but we have highlighted their effect because taxes—unlike rents, home prices, wages, or electric bills—can be changed through sheer political willpower.

California has cut taxes in the past, most dramatically with 1978’s Proposition 13, and when it has done so, prosperity has followed. Ballot propositions this November aim to do the reverse, raising taxes on business owners while the state is still struggling to hold its own against more aggressive, confident rivals. The results will send a strong signal, whichever way they go: the state’s voters will be deciding to continue on the path of high taxes and high costs—or to make a break with the recent trend of decline. 

In the meantime, California’s leaders are not powerless to stem the state’s declining appeal. For example, they certainly can do something about the instability of public-sector finances, which is likely one of the key factors pushing businesses and people toward other states. They can also rethink regulations that hold back business expansion and cost employers time and money. And though there is no changing the fact that California is more crowded than it used to be and is no longer as cheap a place to live as it once was, policies can make the state more livable. One reason that land is costly now is that much of it is placed off-limits to development. Spending on transportation projects where they are really needed—in congested cities—can ease life on freeways that now resemble parking lots.

California’s economy remains diverse and dynamic; it has not yet gone the way of Detroit. It still produces plenty of wealth that can be tapped by state and local governments. Tapping that private wealth more wisely and frugally can go far to keep more of it from leaving.

APPENDIX: How IRS Data Is Used to Analyze Migration

The IRS/Census processing of tax-return data involves the matching of returns between two tax filing years. The returns are matched on the primary tax-filer ID (Social Security number). When a match is found, the return is coded to the appropriate address—or addresses, in the case of a migrant return. The IRS then looks at the number of individuals represented in the return, via the number of exemptions claimed. In most cases, the exemptions will be the taxpayers and dependent children. Hence, counting by exemptions provides an accurate count of the number of people who have moved. The IRS data provide a count of the number of returns (with, in each return, the number of exemptions) that have changed address between one year and the next.

 

 
 

The Manhattan Institute, a 501(c)(3), is a think tank whose mission is to develop and disseminate new ideas
that foster greater economic choice and individual responsibility.

Copyright © 2014 Manhattan Institute for Policy Research, Inc. All rights reserved.

52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494