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Thursday, Jun 20, 2024

OC Leader Board: The Great California Exodus

Editor’s Note: Jim Doti has been one of the nation’s most prescient economists. Tom Campbell was a Stanford University professor when he was elected to Congress to represent Silicon Valley. Gerald Parsky is a member of the boards of Irvine Co. and the Public Policy Institute of California (PPIC).

Not only are people leaving California in droves, but they are taking their earnings with them.

In the most recent IRS report for calendar year 2021, the total inflow of adjusted gross income (AGI) from people moving to California from other states was $21 billion versus a total outflow of $51 billion.

That resulted in a net loss of $30 billion in California’s AGI.

As shown in Chart 1, that loss in California’s AGI has steadily increased each year since 2017. Cumulatively, the total loss in California’s AGI during the 2017-21 period was $78 billion.

That, in turn, means California’s AGI in 2021 was $78 billion lower than it otherwise would have been had the state not lost so much AGI over the years.

These losses in AGI are not simply the result of more people moving out than those moving into the state. An increasing share of the net loss in AGI is comprised of taxpayers in the $200,000 and over tax bracket.

As shown in Chart 2, 41% of the net outflow of California’s AGI in 2017 was made by those earning $200,000 and over. It steadily increased to 69% by 2021.

Although tax filers in the $200,000 and over income class represent only 8% of the total number of Californian tax returns filed in 2021, they paid 78% of all income tax revenue collected by the state.

That’s why those leaving the state will have a disproportionately adverse effect on tax collections.

One doesn’t have to look far to find the major reason for this exodus. The Tax Foundation ranked California’s income tax as 49th highest of all the states, just below New Jersey (No. 50) but ahead of New York (No. 48).

Not surprisingly, as shown in Chart 3, these were two of the only three states—the other being Illinois—where California experienced a net inflow of AGI between 2017-21.

As for the outflows, 45% of California’s lost AGI of $71 billion between 2017-21 went to only three states—Texas, Nevada, and Florida—all of which have no state income tax. That fact gives these states a strong magnetic pull, especially on the part of high-income earners.

For example, someone with an AGI of $2 million in California pays on average about $340,000 in state income taxes. Some might argue that such a “fat cat” deserves to pay that tab.

But moving next door into Nevada saves that cat $340,000. Meantime, California loses it.

Even leaner cats earning $500,000 in AGI would save about $40,000 annually by moving to Nevada.

True story: A Chapman retiree who moved recently to a new residential development near Henderson, Nev., sent a photo of a Porsche Panamera to a friend with a note: “Paid for by the State of California.”

The magnetic push-pull of varying income taxes by state can be seen in Chart 4. This chart places states into five groups ranging from the 10 states that were the lowest in the Tax Foundation’s ranking of income taxes to the 10 states that ranked the highest.

Notice that the cumulative net AGI inflow of the states that ranked 1-10 was $390 billion between 2017-21.

In sharp contrast, the states that ranked 41-50 had a cumulative net outflow of $446 billion. California represented $78 billion of that outflow.

The IRS data upon which these calculations are based end in 2021. While we don’t yet have data on inflows and outflows of AGI by state in 2022, we do have stats on people flows, namely that the net outflow of people from California to other states increased from 347,000 in 2021 to 407,000 in 2022.

That’s a sharp increase of 17% in only one year.

Such a large net outflow of Californians to other states in 2022 points to even larger net outflows of California’s AGI than the $30 billion lost in 2021.

That would put California’s cumulative loss in AGI from 2017-22 at more than $100 billion. The magnitude of that loss occurring because people are leaving for greener pastures is emblematic of a deep-seated structural problem facing the state.

Obviously, California’s lost AGI is reaching the point where it could be called “The Great California Exodus.” That exodus is too large for Sacramento to ignore.

There are solutions, and they are not what you might expect. Watch this space for the suggested solutions.

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Sonia Chung
Sonia Chung
Sonia Chung joined the Orange County Business Journal in 2021 as their Marketing Creative Director. In her role she creates all visual content as it relates to the marketing needs for the sales and events teams. Her responsibilities include the creation of marketing materials for six annual corporate events, weekly print advertisements, sales flyers in correspondence to the editorial calendar, social media graphics, PowerPoint presentation decks, e-blasts, and maintains the online presence for Orange County Business Journal’s corporate events.

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