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Where Do Our Taxes Go? Before Leaving California, Consider the Facts Thumbnail

Where Do Our Taxes Go? Before Leaving California, Consider the Facts

By Joe Delaney

It’s been reported that individuals and businesses are leaving California at increased rates, and many suspect economic forces are the primary driver.

These trends started before the pandemic. In 2019, 653,000 California residents left the state, likely in search of more affordable housing, significantly outpacing entry with just 480,000 coming in. While that’s a bit less than in 2018, the overall trend for the last decade has been a steady increase of leavers.

In 2018 and 2019, 765 commercial facilities left California, following a decade of about 13,000. Some big names left in 2020, including Oracle, Palantir, and Hewlett-Packard Enterprise. Charles Schwab is packing up to leave San Francisco for Dallas. Notable wealthy individuals have also left recently, including the world’s richest man, Elon Musk.

Where are they going? To states with lower taxes. Homeowners, businesses and wealthy individuals are drawn to locales with lower housing costs, lower income tax rates, or no personal income tax at all, like Nevada, Florida and Texas.

The Real Tax Question

The question I want to answer is not whether people who are leaving California look forward to paying less in taxes. I’ve never met anyone who isn’t interested in reducing their tax burden. Instead, I’m curious about the value of the tax dollars those of us who still live here are paying.

How much you pay in taxes is only one side of the equation. The other side is about where those tax dollars go.

Leaving California isn’t something those of us who love our state would do lightly. It may or may not make sense for you to do so for tax reasons. The purpose of this article is not to convince you one way or another. I only want to present us with some objective facts so we can be more informed.

California Sources of Revenue

Quick facts about the State of California:

  • Population: 39.5 million
  • Highest Personal Income Tax Bracket: 13.3%*
  • Sales and Use Tax: 7.25% (some districts add to this)
  • Average Effective Property Tax: 0.73% 
  • Median Home Price: $712,430

*This could increase to 16.8% for the highest earners. If passed, a bill in the state legislature, AB 1253, will raise the tax rate to 14.3% for incomes over $1M, 16.3% for incomes over $2M and 16.8% for incomes over $5M, plus inflation adjustments as it is retroactive to January 1, 2020. At the time of writing, the bill is “inactive,” but could be taken up again in the Senate.

California Spending Plan 2019-2020

Most of the data below comes from the Legislative Analyst’s Office (LAO), the nonpartisan fiscal and policy advisor for the state legislature. This report from 2019 reflects the spending priorities of the legislature before the pandemic, in a “normal” year. I’ll note where adjustments were made in 2020.

Revenue Estimates

In 2019, these were the expected totals from the three largest revenue sources:

  • Personal Income Tax: $102.4B
  • Sales and Use Tax: $27.2B
  • Corporation Tax: $13.1B

Total budget from these and other sources: $208.9B.

Major Budget Categories 

Education ($103.4B)

Under Proposition 98, a minimum percentage of the state budget must be spent on K-14 education. The formula is tied to economic growth but consistently guarantees that at least roughly 40 percent of the state’s budget supports K-12 schools, community colleges, some preschool and child care services, and certain other educational agencies.

In the 2019-2020 budget, the Prop 98 funding minimum was $81.1B. Additional education for early education and state college spending comes out of the General Fund, as does school employee pension payments. Examples of budget line items include:

  • Early Education Programs - $1.3B ($469M ongoing)
  • Pension Payments - $850M
  • California State University - $713M ($392M ongoing)
  • University of California - $416M ($246M ongoing)

In response to the $54.3B budget problem caused by the pandemic, the state made significant adjustments to save hundreds of million of dollars while maintaining Prop 98 minimums.

  • Removal of funding for new early education initiatives.
  • Reduction of community college funding.
  • Reduction of state university funding.

Health and Human Services ($26.4B)

This category includes a variety of public assistance programs, from cash and food assistance to subsidized health insurance and disability services.

  • Expanding Healthcare Coverage and Increasing Affordability - $550M

The bulk of these funds ($429M) were earmarked for subsidizing coverage through Covered California, the state-run health insurance marketplace for households with incomes up to 600 percent of the Federal Poverty Level. It also includes funds for Medi-Cal ($74M), the health insurance program for individuals below the FPL. Per LAO, the Medi-Cal funding would “expand comprehensive Medi‑Cal coverage to all income‑eligible adults ages 19 through 25 regardless of immigration status.”

  • CalWORKs - $332M ($442M ongoing)

According to the program website:

“CalWORKs is a public assistance program that provides cash aid and services to eligible families that have a child(ren) in the home. The program serves all 58 counties in the state and is operated locally by county welfare departments.”

  • Department of Development Services Provider Rate Increase - $126M ($253M ongoing)

Per the DDS website:

“(DDS) ensures that Californians with developmental disabilities have the opportunity to lead independent, productive lives in their community of choice. DDS oversees the coordination and delivery of services to over 350,000 individuals who have cerebral palsy, intellectual disabilities, autism, epilepsy, and related conditions through a network of 21 regional centers and state-operated facilities.”

HHS Programs Subject to Suspension

Several HHS programs are to be put on the chopping block should revenue not be sufficient to cover them. With a $54.3B budget problem due to the pandemic, massive program cuts are now a very real possibility. Some of the programs subject to suspension on 12/31/21 include:

  • Planned increases to pay and service hours for providers.
  • Extension of some Medi-Cal benefits.
  • Emergency Child Care Bridge Program supplement (part of the foster care system).
  • Financial aid during the summer for UC and CSU students.
  • Some senior nutrition programs.

Transportation ($23.5B)

The transportation budget covers the work of the California Department of Transportation (Caltrans) including infrastructure maintenance and repair, the California Highway Patrol, Department of Motor Vehicles, and the High-Speed Rail Authority.

  • Caltrans - $14.7B
  • CHP - $2.5B
  • DMV - $1.4B
  • HSRA - $8.9M ($8.2M ongoing)

Despite falling diesel sales tax and gasoline excise tax revenues, the pandemic has evidently not impacted the 2020-21 transportation budget as much as you might expect. Funding actually increased to $26.4B. According to LAO, “Caltrans is able to maintain funding for its programs supported by these revenue sources because it has built up sufficient fund balances.”

Judiciary and Criminal Justice ($15.4B)

This category covers the Dept. of Corrections and Rehabilitation, Judicial Branch of state government, Dept. of Justice, Board of State and Community Corrections and other departments.

  • Dept. of Corrections and Rehabilitation - $12.6B
  • Judicial Branch - $2.2B
  • Dept. of Justice - $333M
  • Board of Corrections - $168M
  • Other - $110M

Natural Resources and Climate Change ($2.9B)

This category includes spending to ensure safe and affordable drinking water. Most of this budget is allocated for continuous appropriations for California’s Cap-and-Trade Program to incentivize the reduction of greenhouse gases, and discretionary spending for promoting low-carbon transportation, reducing air pollutants, etc.

  • Cap-and-trade continuous appropriations - $1.3B
  • Discretionary spending - $1.4B

Housing and Homelessness ($1.9B)

This category covers a variety of programs aimed at addressing the problem of homelessness. This is a combination of grants to support local initiatives (such as San Francisco’s Department of Homelessness and Supportive Housing Services, or HSH), loans to support housing projects and funding the infrastructure needed to support affordable, multi-family housing.

  • Local Programs - $650M
  • Mixed-Income Housing Loans - $500M
  • Infrastructure Funding (to support high-density housing sites) - $500M
  • Local Planning for Housing - $250M

Debt and Liability ($18.9B)

This category covers all debt repayment and pension payments paid out of the General Fund.

Surplus Spending ($21.5B)

Pre-pandemic, the state enjoyed a $21.5B surplus. The largest portion ($9B) went to debt and liability payments, including state employee pensions. The second largest portion ($6.5B) went to one-time programmatic spending, the third ($4B) to ongoing programs, and the remainder ($2.1B) to reserves.

Other Programs

Additional programs funded to a lesser extent than the above include criminal justice initiatives such as substance abuse treatment and programs to transition ex-cons back into communities. Disaster preparedness, response and recovery ($700M) is another line item of note, given the increasing devastation of wildfires over the last several years.

Comparison with Florida

How do these spending priorities match up with one of our no-income-tax competitors? I decided to take a brief look at Florida for comparison.

Quick facts about the State of Florida:

  • Population: 21.48 million (54% of CA)
  • No Personal Income Tax
  • Sales Tax: 6% (some taxes lower; highest is 6.95% on electricity)
  • Average Effective Property Tax: 0.83% 
  • Median Home Price: $279,450

Florida State Budget 2018-2019: $88.7B (42% of CA)

Breakdown of Budget Categories

Category

California

Florida

Education

49.5%

28.47%

HHS

12.6%

41.86%

Transportation/Environment

12.6%

16.72%

Criminal Justice

7.4%

5.26%


Objectively speaking, Florida takes in less tax revenue per capita than California. It invests far less proportionally in education, and far more in healthcare and human services, than California. 

What to Consider Before Leaving California

This is not at all a comprehensive look at how California prioritizes spending our tax dollars. It’s just a start in gathering objective information. If you have questions about individual programs, especially those funded by state grants but run at the local level, there is a lot more to dig into.

Once you’ve gathered the facts that matter to you, the next question is about what it means to you. How well does the way your tax dollars are allocated reflect your values and your priorities?

If you call California your home, you may not be prepared to leave the state based on how much you pay in taxes alone. How your taxes are used - the value your tax dollar returns to you, your business or your community - is important, too. 

If you find the values reflected in the state budget don’t reflect your own, you have the same three options anyone has when presented with a problem: Freeze, Flight or Fight ...

  • Freeze means staying here and accepting things as they are.
  • Flight is what many are doing, and may be the best option for you.
  • Fight means staying and trying to effect change by making your voice heard.

As your financial lifeguard, I’m here to help you navigate major life decisions like this. Before leaving California, let’s take a look at the facts. Let’s make a personalized plan. Lifeguard Wealth is here to help you choose a course of action that’s best for you, whatever that may be. 

The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2020, Lifeguard Wealth