In recent years, California has seen a mass departure of its wealthiest residents. According to the U.S. Census Bureau, the population of California has reached its lowest number since 2015, falling below 39 million in 2023.
This change in demographics has had an economic impact on the state, as wealthy individuals who make a significant contribution to the state’s tax revenue are choosing to move elsewhere. This has raised concerns about the economic future of California.
The Worrisome Loss of Wealth and Talent
In the past three years, California has witnessed an unsettling trend: the departure of about 750,000 residents.
This out-migration, highlighted by The Los Angeles Times, isn’t just about the numbers. The real concern lies in who is leaving — high-earning, well-educated workers. Joel Kotkin of Chapman University told the Los Angeles Times, “People who are leaving are taking their tax dollars with them.”
Taxation: The Primary Reason for Departure
The reason for this exodus is believed to be California’s high taxation rates. The state has the highest rate of income tax in the U.S., with the wealthiest residents paying up to 14.4%, according to Forbes.
Todd Litman, an Estate planning attorney, highlighted the issue in a statement to Sky News: “I’m seeing anywhere from two to five clients a month calling me and saying ‘We’re leaving.'”
Businesses Joining the Exodus
MoneyWise reports that this trend of relocating from California isn’t just limited to individuals. Businesses are also leaving due to the state’s high tax rates, regulations, and high costs of labor and energy costs.
The movement of companies out of the state further contributes to the economic challenge, resulting in additional loss of tax revenue and jobs. California is already facing fiscal concerns thanks to a record budget deficit of $68 billion, a situation that is intensified by a decrease in tax revenue.
Safety Concerns in California
The Los Angeles Times spoke to Soo-Jin Yang, a business owner who grew up in California but recently relocated to Nevada.
Yang no longer felt safe operating her designer eyelash business from Oakland, but also cited the fewer regulations and no personal income tax as reasons for choosing Nevada. She highlighted “the tax breaks, more affordable wages,” as incentives for relocating to Nevada.
Middle-Class Struggles
MoneyWise details how the middle class of California is also affected by the tax burden. Those earning around $137,000 annually fall into a 9.3% state income tax bracket, according to IRS migration and personal income data.
In the context of post-pandemic economic challenges such as inflation and increasing housing costs, the snowballing effect of state, federal, property, and sales taxes places a significant financial strain on the middle class.
New Destinations for Californians
Data from Smart Asset reveals that tax-friendly states such as Texas, Florida, Arizona, Tennessee, and Nevada are experiencing an increase in the number of Californians, especially retirees, relocating there.
Texas and Florida, both states with no personal income tax, experienced the highest population growth in 2023, per data from the 2023 census.
Considering the Full Tax Picture
When deciding to move, individuals must consider more than just income tax rates. Bankrate explains that States like Texas and Tennessee compensate for the lack of state income tax with higher property and sales taxes.
For example, Texas has one of the highest effective property tax rates in the country at 1.68%, while Tennessee has the highest sales tax rate at 9.548%. These factors play a crucial role in determining the overall affordability of a state.
Consequences for California
The withdrawal of wealthy individuals and businesses from California has broad-reaching implications for the economic health of the state and for those residents who remain.
MoneyWise describes how this reduction in tax revenue can have a negative effect on public services and infrastructure in the state.
Demographic Shifts: A New Reality for California
The trend of wealthy individuals and businesses leaving California signifies more than just a drop in population; it illustrates a shift in the demographic composition and economic health of the state.
This shift raises questions about how California will adapt to these changes and what strategies it will make use of in order to maintain its economic stability.
Trump’s 2017 Tax Cut: A Catalyst for Californian High-Income Migrations
Research conducted by Stanford finance professor Joshua Rauh reveals the 2017 federal tax cut, supported by President Donald Trump, also significantly influenced high-income California residents to relocate.
The tax change, which limited state and local tax deductions to $10,000, nullified the benefits of federal tax cuts for many due to California’s high state income and property taxes.
California’s Economic Outlook
California now faces vital decisions about its future. The state is now forced to consider whether to adjust its tax policies to retain and attract residents and businesses or find alternative methods to maintain its economy.
These choices will significantly influence California’s path forward and its role as a leading U.S. state.
