Don’t Treat California as a ‘Luxury Good’

The Golden State has enjoyed as much prosperity and created as much wealth as any society on the planet.

Its economic output rivals Germany and boasts more than 370 firms with a market cap of more than $1 billion.

The great economic engine powered by California’s robust private sector creates and maintains more than 17 million jobs, paying $1.6 trillion in annual wages and salaries. California has the ninth highest median household income of all states.

Taxes on businesses, entrepreneurs, and wage earners sustain hundreds of billions of dollars in state and local government spending, including jaw-dropping budget surpluses over the past couple of years.

California may be one of the greatest prosperity generators the world has ever seen. But even so, it’s often no match for the toll that the state’s relentless cost of living takes on affordability for working and middle-income families. This crisis of affordability — much of it a result of or exacerbated by public policy — is the clearest and most immediate threat to continuing California’s greatness.

The Governor agrees. “So as we go forward,” Governor Gavin Newsom proclaimed in his 2023 Inaugural Address, “we must continue our quest for an honest accounting of where we’ve fallen short: on affordability, on housing, on homelessness.”

In some ways, the great success of California sowed the seeds of the affordability crisis. Economic growth, the international renown of our high tech, biotech, entertainment and agricultural sectors, and our world class higher education systems, to name a few — these accomplishments can cloud the judgment of elected leaders, leading them to treat California as a “luxury good,” believing that residents are willing to pay an ever-increasing cost to live here. This attitude gives rise to expensive and divisive policy initiatives that serve political constituencies and cultural trends, but which do not register with residents and taxpayers.

It costs a lot to make a life in the Golden State.

The good news is that California family income growth has outpaced the nation. Between 2011 and 2021, median inflation-adjusted household income increased by 27% in California, compared with 17% nationally. Hourly wages in California for private sector workers are about one-sixth higher in California than in the nation, and have climbed by 42% over the past decade, compared with a 38% increase nationally.

The typical family and worker is making more in California, which is a good thing, because it sure costs more to live here.

Housing: Biggest Expense

The biggest expense for most Californians is housing, and every year costs grow for both prospective homeowners and renters. California housing costs are infamous nationally and are perhaps the biggest selling point for workers when workplaces are expanded or moved outside of the state.

But most dispiriting is that the cost of housing is among the greatest contributors to poverty in California. According to the Public Policy Institute of California (PPIC), if the cost of housing had held constant at 2013 levels, 800,000 fewer Californians would have been in poverty in 2019. Unless more housing is built for every income level, which is the only solution to high housing costs, no amount of safety net relief can reverse poverty trends in the state.

High-Cost Essentials

In addition to the high cost of housing, Californians also face a “luxury tax” on other essentials. We have among the highest utility rates and gasoline prices in the nation, much of it a direct result of public policy. The consensus of California’s elected officials is to move full speed ahead to make California a world leader to address the root causes of climate change. The resulting policies have created real-world costs for Californians.

California Exodus

Choosing to make California a luxury good means we are pricing ourselves out of the market. Residents and businesses are voting with their feet.

According to the Department of Finance, the current fiscal year marks four straight years of population decline, during which California’s population has decreased by about 643,000 residents — more than the combined headcount of Long Beach and Santa Rosa. The preponderance of the CalExodus is to nearby states, to whom we’ve lost residents every year since 2001.

Historically, residents who left California were different from those who moved into the state. In general, new Californians were more likely to be employed, better educated, and to earn high wages than those who moved away. But in the past five years that trend has changed; the flow of middle-income residents out of the state has accelerated and net gains among higher-income adults have ceased.

Workable Ideas

The Legislature has at hand any number of sensible, workable ideas to reverse the unaffordability trend and promote growth. To name a few:

  • Reform the California Environmental Quality Act (CEQA) to reduce time-consuming and costly litigation that discourages or prevents construction of new housing, renewable energy projects, and critical water storage.
  • Reject new taxes, and hidden taxes, that penalize employers for investing or producing in California, and that increase costs or reduce availability of products or services.
  • Restore a just and accessible forum for workplace disputes by replacing the broken Private Attorneys General Act (PAGA) scheme with a responsive administrative process that puts employees first and reduces costs and uncertainties for employers.
  • Ensure that further greenhouse gas mitigation measures are technology-neutral, cost-effective, and include system reliability and public safety as guiding principles.
  • Mitigate future employer costs and hiring disincentives by helping repair the Unemployment Insurance Fund deficit and reforming the program going forward to reduce costs and increasing efficiencies.

Shadow of Reality

California retains significant competitive advantages as a place to start or grow a business. Employers, alongside many elected and community leaders, toil diligently to make California home for their enterprises. But our economic recovery and return to the post-pandemic new-normal is shadowed by the reality of just how much it costs to live in California. Public policies have created luxury taxes on essentials for living, and make our state increasingly unaffordable for California residents and unattractive to those who might otherwise come here to invest in our economy.

Loren Kaye
Loren Kaye was appointed president of the California Foundation for Commerce and Education in January 2006. He has devoted his career to developing, analyzing and implementing public policy issues in California, with a special emphasis on improving the state's business and economic climate. He also was a gubernatorial appointee to the state's Little Hoover Commission, charged with evaluating the efficiency and effectiveness of state agencies and programs. Kaye served in senior policy positions for Governors Pete Wilson and George Deukmejian, including Cabinet Secretary to the Governor and Undersecretary of the California Trade and Commerce Agency. See full bio.