A Pacific Research Institute study finds job growth since the pandemic at less than half the national rate and a shrinking share of the national economy, as Cato and Mercatus rankings place California near the bottom for tax and regulatory freedom
A State At A Turning Point
California remains the largest economy in the United States, with a population, a technology sector and a culture that still draw people from around the world. But a growing body of evidence suggests the state is losing ground. In April, the Pacific Research Institute published California’s Crossroads, a report by Wayne Winegarden and Kerry Jackson. Reason’s J.D. Tuccille summarized its findings in a piece headlined high taxes and burdensome regulations are killing California, according to report.
Slower Growth
According to the report, job growth in California since the COVID-19 pandemic has been less than half the national rate, and private-sector employment outside healthcare is shrinking. California’s share of the national economy is about 13.8 percent, down from its 2021 peak. Had the state kept its 2021 share, the report estimates, its economy would be 4.6 percent larger, worth roughly 14,000 dollars per household.
Those are striking numbers for a state that has long thought of itself as the engine of American innovation. They suggest that California’s economic advantages are being eroded by its own policies.
The Great Departure
The report also highlights population movement. Citing Public Policy Institute of California data, it notes that from 2010 through 2024, almost 10 million people moved out of California, while just over 7 million moved in. One in five Californians, 21 percent, have considered leaving because of a lack of well-paying jobs. Major companies have moved their headquarters out of the state, including Tesla, Chevron and CBRE Group to Texas, and Palantir to Denver and then Miami.
The departures are not only of companies. They include middle-class families priced out of housing, retirees seeking lower taxes and young workers who cannot afford to start a life in coastal cities. Each departure represents a judgement about where the future is brighter, and too many Californians are concluding it is somewhere else.
Tax And Regulation Rankings
Independent rankings tell a consistent story. The Cato Institute’s Freedom in the 50 States index places California 46th of 50 for tax policy, with combined state and local tax collections at 13 percent of adjusted personal income, and 49th of 50 for regulation. The Mercatus Center’s 2024 count found California to be the most regulated state in the country, with 420,434 regulatory restrictions, compared with 300,095 for second-ranked New York.
Numbers like these are not abstractions. Every restriction is a rule someone must read, interpret, comply with and pay for. For large companies, compliance is a cost of doing business. For small businesses, including the surf shops, board shapers, cafes and contractors that give coastal communities their character, it can be the difference between staying open and closing.
Reading The Report Carefully
The Pacific Research Institute, Cato and Mercatus are free-market organizations, and their research reflects a particular policy perspective. Defenders of California’s policies argue that the state’s high taxes fund valuable services, that its regulations protect workers, consumers and the environment, and that its economy remains enormous and innovative. They point out that population trends have many causes, including housing costs that stem as much from local zoning as from state taxes. Those arguments deserve a hearing. But the core data, on job growth, migration and the state’s share of national output, come from mainstream sources and point in a worrying direction.
The coastal economy illustrates the problem. Surf industry businesses, from wetsuit manufacturers to board builders, have faced pressure from costs that make it hard to manufacture in the state. Many brands that began in California garages now produce elsewhere. Some coastal towns have watched their working-class surf communities thin out as housing costs and regulations make it harder for ordinary people to stay. The surf may be free, but living near it is not.
Housing is at the centre of almost every account of California’s challenges. Restrictive zoning, lengthy environmental reviews under the California Environmental Quality Act and high construction costs have produced some of the most expensive housing in the country. Recent reforms to speed approvals and limit abusive environmental lawsuits are steps in the right direction, but years of underbuilding cannot be undone overnight.
The Billionaire Question
The report and Reason’s coverage also link the departure of high-income residents partly to the proposed billionaire wealth tax now on the November ballot. Some estimates of departing wealth are personal and should be treated with caution, but a Hoover Institution study has estimated that departures already removed hundreds of billions of dollars of billionaire wealth from the state’s tax base. Whatever voters decide, the debate itself sends a signal about how California views those who build and invest.
What Would Turn It Around
A state that wants to keep its people and businesses needs to make life and work affordable. That means building more housing by loosening zoning and speeding approvals. It means stable, competitive taxes rather than ever-higher rates and new levies. It means rolling back regulations that impose costs without clear benefits, and reforming permitting so that projects, from homes to energy infrastructure, can be completed in years rather than decades. And it means treating entrepreneurs and investors as partners in prosperity rather than as targets.
California’s natural advantages, its coastline, its climate, its universities, its culture of innovation, are extraordinary. The surf is still world class. But natural advantages can be squandered. The PRI report calls this moment a crossroads. The direction California chooses will determine whether the next generation stays to ride its waves, or packs up the boards and heads east.