California Promise: Opportunity for All

2020 Business Issues Guide

Can Californians Afford California?

By many important measures, California has never been better off. Our state enjoys unprecedented wealth, employment and health.

Our economy created 3.4 million jobs in the 10 years since the worst of the Great Recession, a 24% growth spurt, driving the unemployment rate to a record low 3.9%. Our job growth has accounted for one out of every seven new U.S. hires. This rising tide has lifted every county with increased employment and income, although with great variation.

Measured by per capita income, California is the fifth-wealthiest state in the country.

The nine-county Bay Area would itself be the nation’s richest state. Coastal Southern California would be the nation’s seventh richest state. On the other hand, the San Joaquin Valley and Inland Empire together would rank 48th among all states in wealth.

California continues to improve its health outcomes, ranking 12th among all states, compared with a ranking of 25th in 1994. Credit our low rates of smoking, obesity and occupational hazards, high physical activity, and enviable clinical care.

If you’re looking for a job or a healthy lifestyle, California remains a dream come true. But there’s a problem…

Many Californians can no longer afford California.

Losing People

In 2019, California lost more residents to other states than it gained from both foreign and domestic immigration combined. This continues a worrisome trend of California losing residents to domestic migration for each of the last 19 years. Since 2000, 2.3 million more persons left California for other states than moved into California. Were it not for our birthrate (which is falling) and international migration rate (which also is falling), California would be experiencing the unthinkable—losing population.

Californians aren’t moving far. Mostly they are headed to western states, with Texas and our western neighbors accounting for nearly half of California movers. More troubling is not the “where,” but the “who.”

Academics have produced some evidence that high income taxes are chasing out some very wealthy individuals, but the dominant domestic migration trend is what you would expect in an expensive state: families with lower incomes move out; families with higher incomes move in.

Californians with the option to move are finding it harder to reconcile the bountiful opportunities with the cost to live here.

Income Above U.S. Average

It’s not as if residents cannot earn a decent income in California.

Between the end of the recession in 2011 and 2017 (most recent year with complete data), average household incomes in California increased by about 25%, well above the average increase nationally of 19%. The California benefit was reflected at every income level. With the exception of Oregon, all our neighboring states and Texas lagged California in income growth, and no other western state had the absolute levels of income as high as in California.

Voter Anxiety

Where our state is losing the competitive edge is in the ability to make ends meet, especially for lower- and middle-income Californians. Californians recognize this, even if their leaders have been slow to provide remedies.

In opinion surveys conducted for the California Chamber of Commerce over the last several years, voters have evinced their anxiety about California’s cost of living. (See Business Issues article “The People’s Voice”)

• Two of three voters with children at home say their children would have a better future if they left California.

• Nine in 10 voters say earning enough to enjoy a middle-class lifestyle is nearly impossible in California. More than half strongly agree with this statement.

• Two out of three renters say owning a home is a high priority, and most of them would move out of state in order to make that possibility a reality.

Half of the state’s registered voters admit to having given serious (24%) or some (28%) consideration recently to leaving California. The high cost of housing (71%) is the most common reason given by voters for wanting to leave California.

Governor Gavin Newsom recognizes that “the state’s affordability crisis continues to threaten working families,” with a burdensome cost of living, especially for health care and housing.

How can state leaders reverse these trends? Quite simply: address the causes and consequences of affordability, especially for middle- and working-class Californians.

Housing Crisis

California’s infamous housing crisis lies at the center of much of the state’s ills, from our high poverty rate to intractable homelessness and flight of middle-class workers and jobs. Lack of affordable housing remains one of the largest threats to California’s otherwise booming economy.

California renters pay 40% more in median rent than the rest of the United States, and median home listings are double the U.S. average. California has the lowest housing vacancy rate in the nation, and a third of young adults, aged 25–29, are living at home with their parents.

California cannot maintain its economic growth and broaden opportunities for citizens of all skill and income levels without committing to a rapid increase in the supply of housing and growing jobs near affordable market rate housing.

Solutions: Elected leaders can moderate the supply-induced affordability squeeze by capping local housing fees, reinstating tax increment financing for targeted economic development to help pay for local infrastructure and housing, reshaping state-local tax sharing to reduce disincentives to approve new housing, quashing further attempts at rent control, reforming the California Environmental Quality Act (CEQA) to remove litigation cost premiums on new housing, and improving highway and transit capacity for new housing to ease the commute for homeowners unable to afford expensive coastal or urban housing.

High Cost of Utilities

Californians are paying the highest and fastest-rising residential electricity costs in the nation. Our residential electricity costs are 42% higher than the national average, and since 2011 have increased more than twice as fast as the rest of the nation. Costs to residents in other western states tend to be below the national average and have increased only slightly since 2011.

California is also an outlier for electricity costs for commercial customers: 47% higher than the national average, increasing more than four times faster than costs nationally.

Solutions: Elected leaders can moderate rapid growth in Californians’ energy costs by throttling back the sprint toward costly CO2 reductions whose costs have landed on ratepayers and motorists, but whose benefits have been difficult to measure, and by permitting development of in-state energy sources that are clean and price-competitive, or that would simply be replaced by dirtier or less secure offshore sources.

Long Commutes

Owning, operating and spending time in a car is a major expense for California workers. Even after decades of investment in alternative options, more than eight out of 10 California workers drive to work alone in a private automobile. About 75% of commuters drive alone, 10% use an automobile to carpool, while about 5% each regularly use public transit, use other nonautomobile options, or work from home. Commute modes vary substantially depending on where the commuter lives and works.

Commute times are much longer in California than elsewhere. Drivers spend about 25% more time to get to work in California, than the average of other western states. Four of the 10 longest commutes in the country are in California—notably driving to and from outlying regions to the Bay Area or Southern California job centers.

Long commutes by automobile mean substantial fuel consumption. Californians continue to lead the nation in purchasing and using cars that use alternative fuels—for good reason. The cost of gasoline in California persistently tops the nation, no matter when on the oil price cycle.

For the last nine years for all grades of gasoline, California’s price per gallon averaged 12% higher than other West Coast states, and 25% higher than Rocky Mountain states.

Tax Rates

Californians pay among the highest rates for many general taxes, including the steepest and most progressive personal income tax, very high state and local sales taxes, high gasoline and diesel taxes, and steep local business and utility taxes.

Taken together, these tax rates propel per capita state and local collections in California far above national averages and our neighboring states. Although the income tax falls mostly on high-income earners, all other state and local taxes do not discriminate on the basis of income and wealth. The consequence of the proliferation and growth of state and local taxes is to burden working Californians with more costs simply to live, drive, work and consume in the state.

Solutions: State leaders must maintain fiscal discipline, especially in anticipation of an eventual economic downturn. They also should secure the long-held doctrine that local special taxes be approved by a two-thirds majority, in light of pressure by special interests to undermine this taxpayer protection in the courts, ensure that non ad-valorem property taxes apply uniformly to all classes of taxpayers and not discriminate based on the use of the property, and oppose other discriminatory or targeted taxes, including a split roll property tax, and targeted taxes on consumer products, industrial practices or high wealth.

Modify Policies

Sadly—but fortunately—many of the challenges California faces are self-inflicted. By summoning their collective will and overcoming entrenched interests, the Governor and Legislature can modify the policies that have burdened their voters and families with high and rising costs.