Its main conclusion: Despite the record $100 billion budget surplus this year, “California’s good fortune may be ebbing. The state was long a magnet for entrepreneurs and capital, enjoying net in-migration from other states. But high taxes, high regulations, and high housing costs are making the state less attractive, and California now suffers from net out-migration.”
I talked to co-author Chris Edwards, first asking why that $100 billion surplus doesn’t make California an example to the country, what Newsom calls the California Way.
“The surplus is a good thing,” Edwards said. “But here’s what California is doing wrong. California has switched from an in-migration state to an out-migration state over many decades. It was the Golden State. But now high-earners in particular are leaving. Elon Musk is the most famous.”
The study itself provided the numbers: “IRS data show the state lost a net 114,652 households to other states in 2020. The state is losing two households earning more than $200,000 for every one that it gains. For this high-income group, that migration ratio is the third worst after New York and Illinois.”
Edwards told me the reason for the exodus: “Taxes are what drive people to move between states. There’s lots of evidence for that. Entrepreneurs often say that’s why they’re leaving. Musk complained about the high cost of taxes and regulations.”
What can California do to make things better? “Lots of states have high surpluses. They should be using their surpluses to cut taxes permanently, to stop driving away people.”
He said one-time refunds, such as the $9.5 billion in tax refund checks currently being sent to Californians, are OK. “But better to use that surplus to permanently change the tax code so they stop driving away entrepreneurs.”
“We well may be in a recession now,” Edwards said. “So they have the money to handle the downturn.”
Is Newsom’s California Way a model for America, especially as he obviously is running for president? “No. California is becoming a less free state,” Edwards said. “California is one of the lowest ranked states. There are many reports about how California is excessively regulated. Housing costs are too high due to heavy regulations. It has the highest gas prices, taxes, and regulations.”
The Cato Report Card scores states from 0 to 100. Scores 34 and below get an F. The worst state was Washington, with a 28 score. Next worst was California, with 29. Surprisingly, two states Californians flee too did not score that well. Texas scored 47, a C grade. Florida got 52, also a C.
Reynolds says that her politics are based on the ideas of limited government, personal responsibility, and individual initiative. As governor, she has translated those beliefs into lean budgeting and major tax reforms, earning her the highest score on this report.
Sununu has resisted pressure to increase taxes and spending, and he has defended New Hampshire’s status as a low-tax state with no individual income tax. One battle has been over legislation for a paid leave program funded by a payroll tax, which Sununu has repeatedly vetoed. Instead, he signed a bill in 2021 allowing businesses to voluntarily opt into a paid leave fund and receive a tax credit to help cover costs.
California could do the same if the people told the politicians to ease our government burdens instead of increasing them.