Threats to the Main Driver of California's Economy

Story Stream
recent articles

Since the Great Recession, California's labor force and economic growth has been dependent on one region: the Silicon Valley-Bay Area. For instance, without the Silicon Valley-Bay Area, the Golden State's employment growth between 2009 and 2014 and real gross domestic product per capita between 2009 and 2013 each drop about 2 percentage points. This is a 55% reduction in economic growth and a 25% cut in employment growth for California without this one region.

Relying on just one region for a significant portion of economic and employment activity places the nation's largest state in a precarious position. But this also has problematic budgetary effects. It is no secret that California's budget is entirely dependent on its economic health for one reason: its volatile, extremely progressive income tax system. As of the enacted Fiscal Year 2015-2016 budget, the personal income tax accounts for 67% of all general fund revenues and 49% of all general and special fund revenues. Because of the personal income tax's reliance on capital gains tax revenue (which in California is taxed as ordinary income), this dominant revenue source experiences wild roller-coaster-like swings when the stock market and economy move. During good times, revenue overwhelmingly flows into state coffers, but even the slightest of downturns threatens to turn off the cash spigot.

And personal income taxes follow the economy and employment. Just as the Silicon Valley-Bay Area is the driver of economic and labor force growth for California, it is the cash cow for California's treasury (again, Greater Los Angeles is presented for comparison).

First the facts: Greater Los Angeles consists of the Los Angeles, Riverside, San Bernardino, Orange and Ventura counties, while the Silicon Valley-Bay Area consists of San Francisco, Alameda, Contra Costa, Marin, Santa Clara, and San Mateo counties. As of 2012, the Greater Los Angeles region's total assessed personal income taxes totaled $24.1 billion compared to $20.9 billion for the Silicon Valley-Bay Area region. But again, Greater Los Angeles is almost 3 times are large as the Silicon Valley-Bay Area. On a per capita basis, the Silicon Valley-Bay Area's total assessed personal income taxes were approximately 2.5 times Greater Los Angeles'.

Because of budget cuts, the Franchise Tax Board didn't produce a statistical tax report for the tax year 2008 (a little bit ironic), but what is interesting is that while Silicon Valley-Bay Area's economic and labor force dominance didn't cement itself (compared to Greater Los Angeles) until after the Great Recession, the region's per capita assessed taxes has been at least double the larger Southern California region since the early 2000's. In fact, there has been relatively little change between pre- and post-Great Recession Silicon Valley-Bay Area compared to Greater Los Angeles.

However, this masks, yet again, the pure dominance of tax revenue coming out of the Silicon Valley-Bay Area since the Great Recession. Between 2000 and 2007, total assessed personal income taxes for the Silicon Valley-Bay Area actually decreased by about 7% (compared to a 51% increase for Greater Los Angeles). Since the recession, however, the northern region has increased almost 76% - 1.8 times faster than Greater Los Angeles. In fact, Greater Los Angeles' growth is about 10 points below its 2000 to 2007 growth. And whereas total assessed personal income taxes for Greater Los Angeles in 2012 was just 14% above its 2007 level, they totaled 28% more than in 2007 for the Silicon Valley-Bay Area.

Again, just as removing the Silicon Valley-Bay Area region from California depresses both its employment and economic growth, doing so also significantly affects its personal income tax collections. Between 2009 and 2012, California's assessed taxes per capita increased 51%. However, if you remove Silicon Valley-Bay Area, this growth falls to just 39% (compared to increasing to 56% when Greater Los Angeles is removed). California's budget is currently in a strong position because of a surge in tax collections, specifically personal income tax collections. Without the Silicon Valley-Bay Area, average assessed taxes per capita would have dropped $249 per year since the Great Recession ended or the equivalent of approximately $7.9 billion per year. That is the difference between budget surpluses and budget deficits.

While many in Sacramento are content celebrating California's so-called comeback and are already starting to draw up their spending priority wish-lists given the healthier budget situation, this is dangerous myopic policymaking. For one, California's revenue good times are volatile and hence, fleeting. Secondly, the current economic (and therefore, budget) success of the Golden State is built on the back of one region. As the Silicon Valley-Bay Area goes, so goes the state. And this region could have some policy threats to endure over the coming years, such as a lack of affordable housing, crumbling or inadequate transportation infrastructure, and a dwindling skilled worker pool.


Carson Bruno is the assistant dean for admission and program relations at the Pepperdine School of Public Policy. Follow him on Twitter @CarsonJFBruno.

Show commentsHide Comments

Related Articles