January 1, Unmasking California’s Economic Crisis

California’s economic landscape has been on a downward spiral for several years now, as experts have pointed out. The state’s economic woes are attributed to a combination of poor governance, high taxes, and stringent regulations, all of which have stifled business opportunities and driven citizens away.

The unemployment rate in the Golden State hit 5.3% in February, the highest among all states and Washington, D.C., as per the Bureau of Labor Statistics. The state’s strict labor laws, regulatory regimes, and heavy tax burdens are seen as the main culprits behind the stunted economic growth and the exodus of businesses and citizens.

“California overregulates businesses and underregulates public safety,” said Will Swaim, president of the California Policy Center. “When you allow people to engage in organized theft from stores or break into cars, for instance, it reduces the ability of markets to function.”

In recent years, retail theft has skyrocketed, particularly in cities like Los Angeles and San Francisco. The Associated Press reports that relaxed crime policies such as Proposition 47, passed in 2014, which downgraded certain theft and drug offenses from felonies to misdemeanors, have incentivized criminals.

In the past year, the state’s economy has only managed to add 82,000 jobs, with 61,100 of those being government positions, according to the California Employment Development Department. This sluggish job market growth puts California at the bottom of the list compared to all other states and D.C.

Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute, attributes this struggle to the state’s regulatory and tax policy. “The burdensome regulations on businesses discourage the formation of new businesses, which has been growing slower than the national economy,” he explained. “Compounding these difficulties, burdensome labor regulations discourage those businesses that do exist from expanding hiring.”

California also bears one of the highest tax burdens in the U.S., ranking fifth in 2020 with an effective average tax rate of around 13.5%, according to the Tax Foundation. The state is only outdone by other Democrat-led states like Connecticut, New York, and Hawaii.

Winegarden further elaborated on the state’s policies, stating, “Policies such as expensive energy mandates, restrictive zoning regulations, high taxes, rent control, and high minimum wages all increase the cost of doing business and decrease families’ purchasing power.”

The state government is also grappling with a massive deficit, estimated to be a record $73 billion in 2024 by California’s nonpartisan Legislative Analyst’s Office. This deficit is partly due to the loss of income as people leave the state. Between 2020 and 2021, 27,000 tax filers with adjusted gross incomes of over $200,000 moved out of the state.

The population of California has decreased by approximately 538,000 from July 2020 to July 2023, with residents leaving for states like Texas and Florida. Despite this, Democratic Gov. Gavin Newsom announced a $97.5 billion surplus in May 2022, which he pledged to spend on drought mitigation efforts, abortion initiatives, and addressing costs from inflation, despite the current surging deficit.

Under Newsom’s administration, California has spent around $30 billion on homelessness since 2019, yet the number of homeless people continues to rise year-over-year. In January 2023, there were 181,399 homeless people in California, a jump of more than 30% since 2007, according to a report from the Department of Housing and Urban Development.

California also boasts one of the highest minimum wages in the country at $16 per hour, with certain industries like healthcare and fast food allowed to set even higher minimum rates. The state is set to raise its minimum wage for fast food workers at chains to $20 an hour on April 1, which has already led to businesses needing to cut staff to keep labor costs manageable.

“The pandemic lockdowns here in California lasted far longer than they did anywhere else,” Swaim said. “And so the hit on retail, and particularly independently owned retail, has been disastrous — you know, small restaurants, independent stores. A lot of these have really struggled to come back. And the tech industry is now continuing to shed jobs.”

The tech sector, which saw a boom during the COVID-19 pandemic lockdowns due to stay-at-home orders pushing more people online, is now laying off employees due to overextension. Companies in the Bay Area alone cut more than 36,000 jobs in the tech industry from 2022 until early 2024.

Environmental regulations aimed at reducing carbon emissions have also burdened several industries, particularly oil and gas companies. Chevron announced in early January that it was anticipating up to $4 billion in asset value reductions due to hostile attitudes toward oil production.

Climate initiatives also weigh on the state’s budget, including $600 million being spent on environmental reviews for a high-speed rail project 15 years after it was first approved.

“All of the activity on the employment side is embedded in this very hostile relationship between people who are very much in love with the idea of regulation and the people who have to live with that regulation, namely the businesses, of course,” Swaim said.

The California governor’s office declined to comment on the record.

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