4 lessons from the California exodus

By Oregon Tax News

California, once an epicenter of population growth and economic opportunity, is losing more residents to other states than it is taking in, according to a new study by the Manhattan Institute. Released in September 2012, “The Great California Exodus: A Closer Look” reports that California has lost 3.4 million residents since 1990 through migration to other states, including Oregon and mostly western and southern states.

The study reflects a troubling trend for the golden state, which during the post-war years became a popular destination for Americans seeking opportunity and a better life. In the last 20 years, California has lost roughly 80 percent of the net domestic migration gained during the previous 30 years. The population shift also has financial implications as relocating Californians take their money with them. While foreign immigration continues at a steady pace, foreign immigrants are typically poor and may initially consume more wealth through public programs than they create.

Oregon is among the top four relocation states for native Californians, trailing only Texas (225,111), Arizona (211,933) and Nevada (198,331) in number of migrants, and appears to be a popular option for retiring Californians. Between 2000 and 2010, net migration between Oregon and California favors Oregon by 121,482 residents, and $3.85 billion in wealth transferred to Oregon as a result.

The sustained exodus of residents and money is a gauge of California’s perceived quality of life and economic opportunities compared to other states. The Manhattan study concludes that a perfect storm of population and economic challenges are likely responsible for the exodus—at least four of which offer lessons for states like Oregon eager to grow their economies and improve overall prosperity.

Lesson #1: Lack of economic diversity can make downturns more painful. During the recession that hit in the 1990s, California suffered more acutely than much of the nation. The state had relied heavily on the defense sector and benefited from the Reagan era arms buildup. The 1990s recession hit as defense spending was receding due to the end of the Cold War, resulting in an unemployment rate 2.6 percent higher than the beleaguered national average in 1993. That’s roughly when the exodus began, and it has continued to this day.

Lesson #2: People will move to states with lower taxes. When California has been committed to low taxes and pursued pro-growth policies, such as in the late 70s and 80s, prosperity generally followed. In 1991, then California Governor Pete Wilson signed off on a $7 billion tax bill that signaled a departure from the past when California resisted tax increases to pay its bills—a trend that continues. The data indicates that Californians are almost universally relocating to states with lower taxes, particularly Texas.

Lesson #3: Anti-growth climate drives business away. In addition to high taxes, California ranks near the bottom on indexes that measure the cost of doing business in a given state. Layers of costly regulations, a large and unresponsive government bureaucracy, union power (compulsory union membership), and high energy costs make it more attractive for businesses to locate outside California and are likely helping to drive the exodus.

Lesson #4: Persistent state budget problems undermine public confidence. California’s fiscal house has been in disarray since the early 2000s. That’s in part because the state budget relies heavily on corporate taxes and capital gains revenue, both of which have been severely impacted over the last decade. It’s also because lawmakers proved unable to restrain spending and make necessary reforms when times were good, leaving it particularly vulnerable to economic upheaval—first in the early 2000s when the dotcom bubble popped and then again during the current economic downturn. Like Oregon, California has a costly public pension system, which continues to exert major downward pressure on the state budget and create significant economic uncertainty. Unfortunately, persistent state budget problems inevitably lead to calls for more taxes, which are easier to pass than meaningful, long-term reforms. Government can no longer be relied upon to provide essential services and tax increases are viewed as inevitable.

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