by Charles Hugh-Smith
Simply put, people move not just to escape unaffordable housing and high taxes. They are moving to escape fiscally irresponsible, ineffective and incomprehensible governance.
Advocates of high state taxes like to point out that surveys find that few high-net-worth households move primarily to lower their tax bills. That may be so, but it doesn’t make sense: high-income, high-net-worth households don’t move away from high-tax states. if they get reasonable value for their taxes. But if services and infrastructure crumble around them even as their taxes continue to rise, the benefits of moving become much more compelling.
In other words, if you’re getting good value for your high taxes, high taxes aren’t enough of a motivation to move. The problem isn’t high taxes per se, rather a high cost of living is the reason to move from a world-class city with great amenities: world-class cities with great amenities have always cost more than less desirable places, even in the 1600s.
The reason blue states are losing population isn’t just high taxes; it is a lack of fiscal discipline and responsibility, and excruciatingly unaffordable housing costs. Immense floods of tax revenue pour into state coffers, but the results of all this spending diminish rather than improve. It seems that the problems will not be solved even if the permanent “solution” – throwing more money at it – fails due to the decline of fiscal discipline and accountability, and the rise of a “stakeholder” mentality where dozens of entrenched interest groups each have. a veto in every decision.
As I’ve explained before, simple government processes like getting a building permit have turned into Kafkaesque nightmares of delays and spiraling costs.in part because all agencies benefit from prolonging the process by finding reasons to ask for a new submission: more delays mean more work hours and more fees.
No one benefits from a fast-track permit process except the general public, and it has no political power. The same political class is re-elected despite their poor performance, so there is no incentive to enforce any discipline or accountability. Failure is the new normal as all “stakeholders” find reasons to interfere with or overturn any plan that might disrupt the selfish, inefficient and ineffective status quo.
Many city and county officials are doing their best to solve local problems and improve basic services, but there’s only so much they can do if the state creates a culture of vested dysfunction, drains most tax revenue and invest the public loan badly. .
As the following excerpts highlight, most middle-income earners leave blue states because they will never be able to afford a home. But because middle-income households pay a modest percentage of taxes on income and capital gains, the state machinery continues even as the middle class priced out of property moves away.
But when the few who pay most of the income tax finally have had enough and start leaving, the tax consequences pile up quickly. The Everything Bubble has generated fantastic capital gains for the wealthiest class, and they have paid a disproportionate share of blue state income tax revenue for those gains.
(Note that California taxes long-term capital gains at the same rate as any other income — no long-term capital gains tax break for you, bucko.)
High earners fleeing California (by Dan Walters):
After 170 years of population growth, sometimes explosive growth, California is experiencing population loss for the first time. As foreign immigration and birth rates declined, they no longer offset net losses from state-to-state migration. Since 2010, 7.5 million people have left California while 5.9 million people have come from other states.
“Most people who move across state lines do so for housing, work or family,” Hans Johnson, a demographer at the Public Policy Institute of California, wrote earlier this year. Johnson also notes that those leaving California tend to be poorer and less educated than those moving into the state, which is not surprising given that housing and jobs dominate motivations.
There is, however, a less obvious subset of those leaving California: high-income families seeking relief from the state’s notoriously high taxes.
The paper found that 39,000 San Franciscans who filed federal tax returns for 2018 had moved out of the city before filing their 2019 returns. Collectively, they took home $10.6 billion in income, while that people who moved into the city during that period reported just $3.8 billion.
Favorable new homes are often located in states that levy little or no personal income tax. Tax-free states include Wyoming, Nevada, Washington, Texas, and Florida. Utah has a flat rate of 4.85%.
Income taxes account for three-quarters of California’s general fund revenue, and the top 1% of taxpayers generate nearly half of those taxes.
That’s just 150,000 taxpayers in a state of 40 million, so even a trickle out has a potentially huge impact on the budget.
Why the middle class is fleeing states that tax the rich:
A recent poll found that 37 percent of Californians are considering leaving the state for this reason alone. California has the highest housing costs among the continental 48 states, and the government has a lot to do with it.
The costs are astronomical, even for government-favored and heavily subsidized affordable housing. The cost of building a subsidized housing unit in California can be as high as $700,000 per unit, according to a recent study by the Government Accountability Office.
Fueled by its high income and corporate taxes, California has a huge budget. Its general fund alone exceeds $200 billion. You might expect, for this money, top-notch government services, but the opposite is true. An essential responsibility of the public sector that greatly influences the quality of life for everyone is basic infrastructure.
California ranks consistently low on this crucial measure, and it’s not alone. Other high-tax states like New York are also at the bottom of the rankings for essentials like roads, bridges and airports, while moderate and low-tax states like Arizona and Nevada are at the top. Money alone is clearly not the deciding factor in what kind of quality of life a government can help provide, and residents notice that.
Simply put, people move not just to escape unaffordable housing and high taxes. They are moving to escape fiscally irresponsible, ineffective and incomprehensible governance which always wants more tax revenue while offering lower quality services and infrastructure. There’s nothing like a homeless encampment a few feet from your million-dollar cottage to change the calculus of one of the benefits of staying there. Throw in decaying public transportation, reduced library hours, and random crime, and all the supposedly great amenities begin to lose their luster.
Heavily subsidized lower-income households have every reason to stay. The top 5% who pay the most taxes and have the most options are getting to the point where all the benefits of moving are starting to outweigh the benefits of staying. If the trickle out of wealth turns into a flood, blue states will no longer be fiscally viable.
Consider the extremely high cost of housing in California, even as the core labor force population plummets. The growing cohort of seniors will not be a driver of growth; they will get more and more benefits and subsidies from the state coffers. It is not a tax solvency formula.