Taxes and Tent Cities: The State of the California Dream

By Charlie Flynn

In 1849, a carpenter from New Jersey named James Marshall, working at Sutter’s Mill at the base of the Sierra Nevada river, would change the fledgling state of California forever when he pulled a fleck of pure gold out of the water. From that day on, the state would become the promised land for fortune-hungry hopefuls from across the globe. It became a place where anyone can make it if they have what it takes, where dreams are just a spattering of elbow-grease away and the rivers, literally and figuratively, flow with flakes of gold.   

The Golden State, as it has aptly become known, has grown from humble beginnings into one of the most prosperous and influential places in the world. California, without the slightest hint of hyperbole, is an economic powerhouse. It’s nominal GDP is over $3 trillion; if it were a country, California would have the 5th largest economy in the world, between Germany and the UK. The Bay Area alone would rank 19th with a GDP of $535 billion. Overall, California makes up nearly 14% of the US economy. If that weren’t enough, California is home to some of the most influential industries world-wide. Silicon Valley is home to half of the world’s tech billionaires and the beating heart of an industry that has shaped the fabric of society like no other. As a result, the region has one the highest per-capita GDP’s in the world at $174,749 per capita. It goes without saying that Hollywood, the centre of the film industry and veritable Mecca to millions of starry-eyed artists , has found its home in Los Angeles. The film-industry raked in an estimated £49 billion for California in 2015, topping every other State including its closest rival, New York. The numbers speak for themselves; California is undoubtedly one of the most important economic centers in the world. 

Its importance, however, doesn’t stop there. Since Bill Clinton won the state in 1992, California has become a Democrat stronghold and a true trailblazer for progressive ideals across the United States and, by extension, the world. To illustrate, California was the 6th state to legalise marijuana, with Scott Wiener of the State Senate pushing for the legalisation of psychedelics, proving the State’s commitment to bringing the calamitous ‘War on Drugs’ to a peaceful end. Additionally, California has some of the toughest gun legislation of any State, became the 5th State to permit terminally ill people to have ‘assistance’ in ending their own life and in 2015, California passed the toughest Equal Pay Law in the United States. If that wasn’t enough to cause any proud Republican to wake up in a cold sweat in the middle of the night, the State also possesses some of the most stringent environmental policies, vowing to produce half their electricity from renewable sources by 2030 and even banning plastic bags in 2016. In terms of immigration, California prides itself on pursuing integration over persecution, having expanded health care to all young adults regardless of immigration status. Indeed, California’s young and dynamic Governor Gavin Newsom has unveiled a new $125 million plan to give undocumented immigrants $500 checks to help them cope during coronavirus. Even this year, California has committed itself to tackling the prevailing social issues of the day by passing a law mandating diversity quotas on company boards.

The icing on the progressive cake, however, is that California has some of the highest tax rates in the country. Notoriously, it has some of the highest State income taxes of up to 13.3% and, while not having a specific capital gains tax rate, capital gains are taxed in accordance with income. At its highest rate, considering additional federal capital gains tax, the richest Californians could be paying an eye-watering 33% capital gains tax, one of the highest rates in the world. It is perhaps unsurprising then that the California State Government tends to spend very liberally, with an overall budget of $208.9 billion, the highest of any state.  In comparison, the runner up, New York, spends around $167 billion.

Big government, high taxes, heavy spending, diversity, drugs and gun restrictions; California represents everything Conservatives loathe and it seems that that is the point. California appears to have taken it upon itself to become a proving ground for the economic ideas of the American left. The Golden State seems determined to prove that liberal fiscal policies  and  a firm commitment to social justice can co-exist with economic success and prosperity; to prove that the California dream can be a reality for all. After all, if the 5th largest  economy in the world can not only survive, but thrive under a progressive system of government, then what better  example  is needed? 

However, as noble as this vision may be, reality may be starting  to catch up. The Covid-19 pandemic, and the State’s ruthless response, has left California bruised and battered, stretching its economy to breaking point. Amongst the ever-present lockdowns, the more insidious side of California’s economic situation has reared its head and has begun to peel off the Golden State’s gilded exterior. 

From Podcaster and Comedian Joe Rogan to political pundit Ben Shapiro, growing numbers of influential people have made their departures from the Golden State public. Maybe more worryingly, Elon Musk has decided that he will not be expanding Tesla into California but will instead be opening his news factory in Austin, Texas. It’s not uncommon to see newspaper headlines declaring that the rich are fleeing California in ‘droves’ and a single google search will turn up thousands of results from people and businesses alike defiantly titled: ‘Why I’m leaving California.’ This isn’t just another case of media hysteria either. Between 2018 and 2019, 691,145 people left California, with 190,122 more people leaving than arriving. This was a 38% jump from the previous year. Since 2007, California has lost about a million people to domestic emigration. Perhaps unsurprisingly, it has become somewhat of a trend for pundits on the more conservative side of the aisle to use these emigration statistics to claim that this ‘mass exodus’ is emblematic of the failure of the liberal ideals of the Californian state and that what we are seeing is almost  a reversal of the 1930’s, with hordes of people piling into their Jalopies, fleeing the progressive Dustbowl behind them and finding salvation in tax-free, business-friendly states like Texas. On the other side of the ideological spectrum, the Democrats are quick to decry these claims, and label this talk as fearmongering and pure sensationalism. The truth, more than likely, lies somewhere in between. However, the more important take-away from this sudden media trend is not that California has become a failed-state, as some would have you believe. Rather, this trend serves to highlight that California is far from being the liberal  paradise it purports to be  and that it is suffering from a number of fundamental problems. 

First and foremost, one of the most commonly cited reasons for Californians leaving the state is the price of property. California has the second-highest house prices of any US state, just after Hawaii, with the median house price currently sitting at $600,000, almost double the national average. The State contains four of the country’s five most expensive residential markets, namely: Silicon Valley, San Francisco, Orange County and San Diego. Los Angeles places a shabby 7th. Nearly 42% of households in California are cost burdened, meaning they spend over 30% of their income on housing. Put simply, California’s supply of new housing has fallen woefully short of the demand. In 2016 it was estimated that in order to resolve the housing crisis, California would need to build 3.5 million new homes. However, the infamous Proposition 13, approved in 1978, makes this extremely difficult as it provided fiscal incentive for cities to favour commercial development over residential projects. To further complicate things, a trend for Californians is to move further and further inland to escape costs around the coast. However, the recent devastating wildfires have made huge areas of potential real-estate uninhabitable. In short, buying  and renting in California is extraordinarily expensive. Crucially, the housing crisis is not merely a problem for the poorest members of society, but for everyone. For instance, teachers in Silicon Valley have been unable to afford rent to such an extent that Facebook was prompted to provide a $25 million donation to build them subsidised apartments. It is therefore unsurprising that California has the 3rd highest cost of living in the United States, after Hawaii and the District of Columbia, with a cost-of-living index at 151.7. To compare, New York has an index of 139.1 and Georgia has an index of 89.2. This is exacerbated even further by particularly high fuel costs with California being the only state where a gallon of gas is over $4. To make matters worse, it’s estimated that over 1 million Californians live in “energy poverty”, meaning over a million people are unable to pay for effective energy services due to the cost of energy which is 50% over the national average. It is perhaps unsurprising then  that people, particularly the middle class, have decided to leave  California. While California is a beautiful place brimming with potential opportunities, the extraordinary cost of living there  is simply too high to be worth it. People can live a substantially better quality of life elsewhere for the same wage. This is especially true in the time of Covid with all manner of industries shifting online. A savvy tech entrepreneur no longer needs to live in a squalid apartment in and around Silicon Valley. Why put yourself through that when you can run the same business from relative comfort in a more affordable state? 

However, the cost of living is perhaps not the most worrying problem for California. Completely contrary to its progressive image, wealth inequality in California is through the roof. 7 of the 15 most unequal cities in the United States are located in California. In 1980, it was only 3. San Jose, the home of Silicon Valley, has the largest gap between high and low earners, second only to Fairfield, Connecticut, notoriously the home of many wealthy New York financiers. In San Francisco, inflation-adjusted wages grew by 18% between 1980 and 2015 for the lowest 10% of the workforce. For those earning in the 95th percentile, pay rose 122%. In other words, the rich are getting richer and the poor are getting poorer at an alarming rate. If that wasn’t enough, according to the US Census Bureau, California has the highest rate of functional poverty in the country. Even with its high taxation policies and huge public spending, one cannot help but think that California is failing the poorest in society and, somehow, exacerbating a system of inequality. A system where only the rich can afford to live well and the poor are continually seeing their precious income swallowed up by the extreme living costs. This is perhaps best exemplified by the explosion of homelessness that has taken over California’s cities. California contains about 13% of the US population. However, an absolutely staggering 27% of people experiencing homelessness in the United States live in California, more than 150,000 people. This alarming number has seen a 22% increase over the last 10 years.  To make matters worse, 72% of the homeless population are unsheltered, with thousands of desperate people being forced to reside in growing tent cities popping up all over major metropolitan areas across the State. Where once there was a single ‘Skid Row’, the epidemic of vagrancy has metastasized and spread to countless streets all across the state and shows no signs of going anywhere. All of this is in spite of the fact that California spends over $600 million dollars a year on homeless services, more than any other State. How exactly this crisis is to be resolved is still a matter of heated debate. However, one thing is clear. The thousands of people left  abandoned on the Streets of LA and San Francisco is a stain upon the reputation of California as a fair and equitable society.  One simple fact makes this even more apparent. Whilst California possesses the highest rate of both poverty and homelessness, it simultaneously possesses 165 billionaires, more than any other US state. If this number were ranked, California would have the third highest number of billionaires in the world. 

In a sense, California seems to have become its own worst nightmare; a place where only the richest members of society can live prosperously, where homelessness is rampant, poverty a reality for untold numbers and the gap between the haves and have-nots continues to widen, even in the face of massive public spending projects and aggressive taxation. Of course, the Covid-19 pandemic has sent all of these problems into a frantic tailspin, but it is clear that California has a long way to go if it is to become the shining beacon of progressive ideals that it could be. Indeed, Governor Newsome has promised swift and direct action to tackle each of the problem’s outlined, especially the ever-deepening homeless crisis. With the right measures and effective Governance, the Golden State can regain its former glow. But, for now anyway, it seems that people are indeed starting to wake up from the California Dream. 

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.

 Photo by Ahmet Yalçınkaya on Unsplash

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