Finanical News – November 2021

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Why Californians Migrate

    California’s population growth stalled in 2020, primarily from an increase in Californians moving out of state. California’s net domestic migration has been a net outflow for every year since 2001, and 2020 was one of the highest years on record.
    Financial and economic concerns are the top explanations for this trend. According to the Public Policy Institute of California, the majority of adults who left California in the 2010, cited jobs (49%) or housing (23%) as the primary concern.
    While there are employees following companies like Tesla out of state, the statistics on jobs belie the inability of many careers to comfortably support the high cost of living in California. This argument is supported by the concentration of net out migration in lower-earning households. There is net in-migration amongst those making more than five times the national poverty level ($138,750) for a family of four.
    Another explanation for the departure of lower income households lies in the relationship between homeownership rates and income. Higher earners are more likely to own homes. In turn, homeowners are more likely to stay put because they are sheltered from increasing housing costs, have low assessed values thanks to Prop 13 and have large embedded gains in their residence.
    Large embedded gains make moving less attractive because of the tax consequences of selling a home. This has become an increasingly common problem for Californians as the $250,000 per person gain exclusion for primary residence has not been increased since 1997.
    Surprisingly, it may be the avoidance of taxes that keeps some homeowners in California. But for those on the highest end of the income tax spectrum, moving out of California mostly means lower taxes.
    There are several common areas for financial planning for those wanting to move out of state. Earned income is typically taxed by the state in which the worker is located when the money is earned. IRA withdrawals and Roth conversions are typically taxed by the domicile at the time of withdrawal or conversion. Most capital gains on stock are taxed based on domicile at the time of sale.
    The lessons of municipal finance suggest high California income taxes are here to stay – or increase. This is not an observation of politics. Other solidly Democratic states have much lower tax burdens than California. For instance, Washington has no income tax and Delaware has one of the lowest total tax burdens in the country.
    California has a high ratio of income tax revenue to property tax revenue. Property tax revenues are stable and income tax revenues are volatile in any jurisdiction. California’s income tax revenues are especially volatile because so much taxable income comes from economically sensitive stock prices via stock options and IPOs. State expenditures easily grow with revenues. When revenues fall, cutting expenses historically has been more painful than increasing taxes.
    In other words, the legacy of Prop 13 ironically makes the outlook for California’s total tax burden less likely to decrease.

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