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Civic
Report
No. 71 September 2012
THE GREAT CALIFORNIA EXODUS:
A Closer Look
Tom Gray & Robert Scardamalia
Executive Summary
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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
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
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| 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.
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