Sunday, February 27, 2011

Why does California have a net outflow of people?

It's been the case since about 2003 that more people leave California than come to California from other states. The crash of the dot-com bubble explains 2003, but what about since then?

Demographers say that the primary problem is high cost of living, the most important of which is the high cost of housing. It's not taxes, because if the problem was taxes, the wealthy (who stand to gain more by moving to lower-tax states) would exit the state at a higher rate than the poor. The opposite is true -- 1.73% of California's poor outmigrate, while only 1.09% of California's wealthy outmigrate. Furthermore a smaller percentage of the wealthy who do outmigrate go to low-tax states as compared to the poor. In short, the data simply does not support the supposition that taxes cause the majority of the outmigration, because if the problem was taxes, the rich (who do pay more money as taxes) would outmigrate to low-tax states in higher numbers than the poor do.

So why does California have higher housing prices? Part of that is the market distortions caused by Proposition 13, which provides a disincentive to buy and sell when your family's needs change (due to a new kid, or the kids leaving home), since you'll pay higher taxes on your new (smaller or larger) home than you paid on your old (grandfathered) home. This results in fewer homes on the market, and thus higher housing prices than would otherwise exist.

Still, that cannot explain the full reason for high housing prices, because the Central Valley of California has significantly lower housing prices than the coastal job centers, and has traditionally been perhaps 10% more expensive than the rest of the country. Yet housing prices in the San Francisco Bay area are often as much as three times more expensive than the rest of the country. The 2010 median home price in the U.S. was $168,000, while the 2010 median for the California Bay Area was $375,000 (Source: U.S. Association of Realtors) -- 2.23 times the national average. What gives?

Well, it's like this: The wealthy individuals who create new companies in California prefer to live in the milder climate and nicer scenery of the coastal areas rather than in the blazingly hot desert that is summer weather in the Central Valley. The core problem we run into then is geography. There are only three large areas of coast in California that can be developed -- the San Francisco Bay area, the Los Angeles / Orange County area, and the San Diego area -- the rest of the coast is mountains with only small flat areas such as around Monterrey Bay that cannot support a large population. And all three of these areas are largely built out -- in Contra Costa County, for example, every flat area of land with the exception of some salt ponds along the coast are built out. The salt ponds are below sea level, which means that homes cannot be built there without being built upon expensive landfill with expensive foundations that have stilts down to firmer soil, which basically restricts these salt ponds to commercial development or to parkland. As for the notion that "most of Contra Costa is zoned for greenbelts", well, yes -- but the greenbelt areas are the coastal mountains which are largely unbuildable due to the San Andreas Fault, landslides caused by all the faulting (since the underlying rock has been fractured by centuries of earthquakes and will slide if you breathe hard on it), and simple steepness of the geography, which makes it extremely expensive to build anything in these areas. Thus as landowners moved away from ranching, they've sold or donated their property to the state or county for preservation as natural areas.

In other words, supply and demand says that housing in the three coastal metropolitan areas will always be more expensive than in most of the nation because a) that's where the jobs are due to the decision makers preferring to live in those areas, and b) thus there will typically be more people who want to live there than there are houses for them. What that means is that during times of a growing economy when these three areas are adding jobs, there will be net inmigration. When the economy is stagnant or declining, there will be net outmigration as people lose their jobs and are forced to return back home to their low-living-expense states. And in fact the data appears to support that. The San Francisco Bay area has experienced net job loss in the lower income job categories over the past ten years. And it's primarily the lower income people who've left for lower-expense areas.

And at this point I'm drowning in data, so I'll let you go. But the salient point is this: High taxes are *not* a cause of people leaving California. Rather, high living expenses -- primarily driven by the cost of housing -- is the major cause of outmigration from California. Anybody who tells you high taxes are causing the loss is saying that based on ideology, because the facts simply do not support such a statement. But then, I keep forgetting, the facts have a liberal bias :).

-- Badtux the Reality-based Penguin


  1. Re: if the problem was taxes, the wealthy (who stand to gain more by moving to lower-tax states) would exit the state at a higher rate than the poor.

    Early in the WI situation, I heard some Rethug say WI couldn't tax the rich because they would just leave. I've heard this before in other contexts. It sounds like bullshit to me.

    Do you have data on the U.S. as a whole, or do you know where I can find it?

    Hope the headache is better.


  2. In my previous post, I posted a link to a state-by-state chart of effective tax rates. Wisconsin's effective tax rate on the rich is 6.7%. The national average state effective tax rate on the rich is 6.4%. California's effective tax rate on the rich is 7.4%. My own personal suspicion is that most of the rich who outmigrate from California are retiring to less crowded places that better fit their personal lifestyle, i.e., it's a quality of life thing, not a tax thing. If you have enough money to retire to anyplace on the planet, California is a good place to retire if you like the fast-paced and energetic California lifestyle, otherwise you're likely to retire somewhere else with a more sedate lifestyle more befitting the average retiree.

    - Badtux the Tax Penguin

  3. Ah yeah, my headache. A couple of Tylenol have reigned it in somewhat. Still feel that ache in the back of my eyeballs. Sinus headaches are a bitch.

  4. We outflowed because of George Fcuking Bush, not taxes. How come nobody points to THAT little bastard as a reason for California's woes?

  5. I just downloaded the doc from your link. Just what I needed - another fucking 130 page homework assignment.

    Seriously, though - thanks.

    Do you have a source for intra-state migration stats?

    JzB the truth-squadding trombonist


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