EDWARD RING, California Policy Center
When state ballot initiatives propose new taxes, it’s big news. But while every election features a handful of state tax and bond proposals that get statewide attention, additional hundreds of local state and bond proposals fly under the radar.
Fortunately, after each election cycle and once all the votes are certified – something that in California doesn’t occur until 30 days after election day – the California Taxpayers Association puts out a report that shows the outcome of every local tax and bond proposal.
This past November, 131 bond proposals were placed on local ballots up and down the state, along with 234 local tax proposals. Of the proposed local bonds, 86 percent of them were approved by voters, dumping another $23.2 billion in debt onto Californians. In terms of budget impact, based on a 5 percent interest rate and a 30 year term, this new borrowing is going to cost taxpayers another $1.5 billion per year in principal and interest payments.
The fate of local tax proposals tells a similar story. 65 percent of them were approved by voters, adding another $1.6 billion annual burden onto California’s taxpayers.
These local increases in taxes and borrowing, which are almost exclusively regressive and will cost taxpayers at least another $3.1 billion per year, are comparable to the impact of Proposition 30 —the statewide ballot initiative rejected by voters in November— which would have added another 1.75 percent tax on personal income above $2.0 million for California’s already overtaxed wealthy households. It was estimated that Prop. 30, had it passed, would have brought in between $3.0 and $5.0 billion per year.
It’s interesting to see the categories of new local taxes. Note on the chart below the projected big earner categories: “Documentary Transfer Tax,” “Gross Receipts Tax,” and “Transactions and Use Tax” (sales tax). The first two of these three are relatively recent innovations in a system that for decades relied primarily on sales tax. Expect more innovative tax schemes, such as “Vacancy Tax,” presumably designed to discourage people from owning real estate unless they plan for it to be occupied.
The propensity for voters to approve local taxes is well documented, as the next chart proves. The only category that has not performed extraordinarily well over the past ten years are General Obligation Bonds, which, while more likely than not to pass, rarely deliver supermajority rate of approval. This is because School Bonds only require a 55 percent majority in order to pass, whereas General Obligation Bonds require a two-thirds majority.
When proponents only have to get 55 percent of voters to approve a bond, it does pretty well. Measured by the amount of proposed borrowing, school bonds consistently log over 90 percent approval by California’s local voters. The payments to service these bonds typically appear on the property tax bills of homeowners, and the amounts are not trivial. Most Californians can expect to pay considerably more than the legislated maximum of 1 percent of their home’s value, mostly thanks to local school bonds that are exempt from these limits.
As for local taxes, 2022 was a below average year for proponents, passing “only” 65 percent of them by number, and 59 percent by amount. While highly favoring proponents, this rate of approval is considerably lower than in previous elections, and may indicate voter fatigue with new taxes.
Although California voters did not approve a single statewide tax or bond proposal in 2022, thanks to these local measures, over $3.0 billion was added to their annual tax burden.
It’s a little early to look ahead to 2024, but three initiatives have already qualified for the November 2024 ballot. One of them aims to “increase personal income taxes to fund pandemic detection and prevention.” Expect additional statewide proposals to increase taxes, since California’s much vaunted budget surplus has evaporated. Voters may also count on hundreds of local tax and bond proposals, and if history is any guide, shall approve the vast majority of them.
Among the most notable people taking part in the Exodus from California are the tech and finance elite. More and more high-profile business leaders are losing their patience with California’s anti-business regulatory morass, sky-high tax rate, and unreasonable cost of living.
In 2017, entrepreneur and author Tim Ferriss left Silicon Valley for Texas. Ferriss cited the closed-mindedness of the Bay Area as one of his reasons for leaving, telling Business Insider that “if you don’t conform to what Silicon Valley views as the established set of credos and beliefs for a hyperliberal, you do get attacked.” He also explained on Reddit that “I’m as socially liberal as you get, and I find it nauseating how many topics or dissenting opinions are simply out-of-bounds in Silicon Valley. These days, people with real jobs (unlike me) are risking their careers to even challenge collective delusions in SF.”
Other tech magnates followed Ferriss’s lead. Ron Suber, a FinTech investor and former executive at Wells Fargo Securities and Bear Stearns, left California in 2020; he relocated to Boulder, Colorado. While Suber said part of his reason for moving was to be closer to his adult daughter, he also highlighted California’s high taxes: “My tax guy yelled at me because I had to pay so much in taxes…Income taxes are only…5% in Colorado, so for each $1 million in passive annual income the delta becomes very real.” The marginal tax rate for highest earners in California is 13.3%.
Elon Musk moved to Texas in 2020. Musk then moved Tesla’s headquarters to Texas in December 2021. Explaining his decision, Musk said: “If a team has been winning for too long, they do tend to get a little complacent, a little entitled and then they don’t win the championship anymore. California has been winning for a long time, and I think they’re taking that for granted a little bit.” Musk has previously been outspoken in his criticism of the “gradual creep of regulations and bureaucracy” in the Golden State.
Joe Lonsdale also left California. Lonsdale co-founded Palantir, a software company that specializes in data analytics, in 2003. Originally based in Silicon Valley, Palantir relocated to Denver in 2020. Lonsdale shares Musk’s view that California’s golden days are behind it.
“Texas is a lot like going to California 40 to 50 years ago,” Lonsdale said. “[Texas is] very welcoming, it’s a dynamic economy, it’s affordable…When you try to hire someone in California you pay them $250,000 a year to come there and they feel poor…You pay them that here [in Texas] and they are living really well.” Lonsdale and his company Palantir were previously located in San Francisco, where the cost of living is 91 percent higher than the national average.
Keith Rabois, an investor in Stripe and former executive at Square, Paypal, LinkedIn and Yelp, left California for Miami. A Bay Area resident for 20 years, Rabois told Fortune that “I think San Francisco is just so massively improperly run and managed that it’s impossible to stay here.”
Of course, for every mogul that leaves, there are hundreds more working Californians who have said farewell to California. From July 2020 to July 2022, California’s resident population declined by more than a half-million people. On January 3, 2023, U-Haul released its 2022 data, reporting that Texas, Florida, and South Carolina are the three top “growth” (or inbound migration) states; California ranked last at 50th.
California’s emigration trends should be a serious wake up call for state and local officials. But rather than asking why individuals, families, and companies are leaving the state in droves, Sacramento is doubling down on laws that destroy opportunity, like AB5 (forcing freelance and independent contractors to become corporate employees) and AB 257 (creating a government panel to set wages and work rules for fast food franchises).
The question is: How long will California’s elected leaders ignore the California Exodus and the entrepreneurs who have warned them that California has lost its luster?
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I vote against every tax increase measure, unless it’s for building prisons. We already pay WAY too much in taxes here in the DPSRC, which is one of the several reasons that I’m moving to a state that has lower taxes AND respects and honors the Constitution, with special emphasis on the 2nd Amendment.