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Chapman Forecast: California’s Economic Decline Continues

Chapman Forecast: California’s Economic Decline Continues

Jim Doti presents Chapman University's economic forecast in Orange, Calif., on Dec. 13, 2022. (Jill McLaughlin/The Epoch Times)

John Seiler

John Seiler

12/18/2023

Updated: 12/21/2023

Commentary
Californians face a difficult economic year in 2024. The state budget deficit will soar to a record $68 billion. Taxes are rising not just from 13.3 percent to 14.4 percent of income for millionaires, but from 9.3 percent to 10.4 percent for the middle class. And prices of goods and services will rise due to the minimum wage increasing from $15.5 an hour to $16 for most workers. Plus the jump will be even higher, to $20 for most fast-food workers and $21 for health-care employees.
With that background, Chapman University’s forecast for the California economy for the coming year was rather gloomy. It was given Dec. 14 by economist and President Emeritus Jim Doti. He began by wishing Christmas season could let him be “the bearer of good news, but not so.” He said jobs growth will continue to slow, and even be less than the U.S. average, as shown in this graph from his presentation, where California is the green line, dotted for future estimates:
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

The contrast is especially shocking with the jobs growth in our competitor states from March 2022 to March 2023. All of them suffer no state income tax, instead of the rising California income tax rates cited above:
  • Texas: 4.3 percent
  • Florida: 4.1 percent
  • Nevada: 3.8 percent
  • California: 0.9 percent
Mr. Doti said California’s jobs-growth rate tied with Iowa’s 0.9 percent for the worst of any state. But the Hawkeye State is drastically cutting its corporate tax rate and considering eliminating its state income tax entirely.
He said he has suggested to the California Legislature cutting tax rates to encourage investment and jobs growth, which in turn would broaden the tax base, and in the end actually increase tax revenues. “But no legislator would touch it with a 10-foot pole.”

Advanced Industry Jobs Declining

California remains the high-tech center of the world. But that’s eroding. Advanced Industry jobs pay two to three times the state average. “This is extremely important because, to a great extent, California and Sacramento have relied on Silicon Valley in terms of tax revenues,” he said, as well as high-tech jobs in Sacramento, Los Angeles, Orange, and Riverside counties. But jobs in this area have dropped from 20 percent of the U.S. total in 2019 to 19 percent in 2023. And look at trendline No. 4 at the right of this chart:
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

I would add this. The previous decline, shown as trendline No. 2 at the left, was caused by the Great Recession hitting California much harder than other states. Then the long rise in the middle, trendline No. 3, occurred with the boom in such social media as Facebook and Twitter, as well as Apple’s incredible gains from the iPhone’s dominance.
But now, the state faces tough global competition from Communist China, such as with the TikTok app and the recent “breakthrough” with the new Huawei chip. U.S. Commerce Secretary Gina Raimondo on Dec. 11 promised the “strongest possible” national-security response to the chip, which reportedly helps Beijing avoid U.S. sanctions.
However, as I have reported in a couple articles in The Epoch Times, California is not helping with this crucial competition by dumbing down its schools in teaching STEM—science, technology, engineering, and mathematics. One was, “California’s Dumbed-Down Schooling Torpedoing US Defense vs. China, Russia.”
By driving out high-tech jobs with high taxes, and failing to school the next generation of tech workers and entrepreneurs, California is sabotaging America’s “long twilight struggle” for freedom, as President Kennedy put it.
The Chapman Forecast also looked at Advanced Industry Jobs in the 15 states with the lowest tax rates and found they grew from 25 percent of such jobs nationally in 2005 to 30.5 percent in 2023. By contrast, California’s percentage was flat 19 percent at the beginning and end.
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

Exodus Continues

Mr. Doti said the recent decline in the state’s population is continuing, with net migration of 1.2 million over the four years from 2019–22. “Just think of the impact that will have on businesses, prosperity, and the economy,” he said. And the people leaving “are higher income, not lower.”
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

He said the Chapman economists originally thought the exiles mainly included low-income workers seeking better prospects in other states. But, “It turns out it’s the higher-income people leaving.” Based on new IRS data for Adjusted Gross Income (AGI), 41 percent of the exiles were making $200,000 or more in 2017. But that rose to 69 percent in 2021.
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

That’s why personal income tax revenues “finally are taking a hit.” The high taxes “are coming home to roost. People are leaving and it’s having a negative effect on revenues of $26 billion in just one year, and that’s huge.” The drop is for fiscal year 2023–24, which began on July 1.
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

Mr. Doti said the $68 billion deficit the Legislative Analyst recently estimated for fiscal year 2024–25, which begins next July 1, “was conservative. It could be higher than that. Somehow the governor is going to have to find that amount of money, either increased taxes or reduced expenditures.”
But as Mr. Doti pointed out earlier in the forecast, as I noted above, it’s the high tax rates that already are driving out people, thus reducing tax revenues. Even higher taxes only will increase the deficit, not cut it.

Taxes Leaving With the People

This next section is crucial because it shows what happens when workers leave—and take their tax payments with them to another state. The following graph shows the cumulative effect of “migratory income.” Mr. Doti said taxes are “the explanation for these domestic outflows. And it’s not only counting the number of people, but the income flows.”
(Chapman University/YouTube screenshot via The Epoch Times)

(Chapman University/YouTube screenshot via The Epoch Times)

The 20 lowest-taxing states, on the left of the chart, were able to bring in an additional $390 billion in taxes from 2017–21. By contrast, the 10 highest-taxing states, on the right of the chart, including giant California, lost $446 billion.

Conclusion: Taxing Us Into Exile

I’ve never seen a more clear demonstration of how reducing taxes attracts jobs and businesses, which in turn boosts the tax base; while doing the opposite drives jobs and businesses into exile, cutting the tax base. And I would add this. People and businesses plan for the future. As tax rates continue to rise, we can expect people and their taxes to leave California even faster for states with lower tax rates.
There’s also the federal factor. The recent inflation under President Biden and the boost in interest rates by Federal Reserve Board Chairman Jerome Powell have greatly increased costs for businesses and families. One way to survive such increased expenses is to move from a high-tax state such as California to a low-tax state such as Florida, which also enjoys much lower home prices.
Taxes have consequences. Until California politicians realize that, the Golden State exodus will continue.
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John Seiler

John Seiler

Author

John Seiler is a veteran California opinion writer. Mr. Seiler has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary for California state Sen. John Moorlach. He blogs at JohnSeiler.Substack.com and his email is writejohnseiler@gmail.com

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