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Changing Dynamics in California Migration Trends

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Changing Patterns in CA Population Migration & Potential
Impacts of Changing Immigration Policies and Tax Law

December 20, 2017

All our Bay Area market analyses can be found here: Paragon Reports

We crunched the numbers on a recent U.S. census report tracking population migration to and from California in 2016, and illustrated them in the chart above. Though this chart refers specifically to state data, the trends illustrated almost certainly apply to the Bay Area to a large extent as well. The census report highlights two issues: 1) More CA residents are moving out to other states than residents of other states are moving into California, and 2) Foreign immigration into California has more than made up this deficit, to continue an overall increase in the population. This next chart illustrates past Bay Area area population-growth dynamics.

The state-wide migration chart at the top of this page is based on 2016 data, and there are now two big wild cards in play which may significantly affect these migration trends.

Firstly, the U.S. government in power now has radically different philosophies and policies regarding foreign immigration than previous administrations, which may dramatically curtail foreign influx numbers into California and the Bay Area in 2017 and subsequent years. It may also increase the number of foreign immigrants who decide to return to their countries of origin, either because the path to citizenship has become more difficult (or impossible), or because they feel that the U.S. has become a less welcoming place (or overtly hostile) to immigrants. It should be noted that foreign immigrants have played a huge role in the high-tech boom of recent years. Approximately 35% of existing Bay Area residents are foreign-born.

Secondly, changes to the tax code just passed by the Republican dominated congress – the limitations on the deductibility of mortgage interest costs and local/state taxes in particular – would not only make living in the Bay Area, which already probably has the highest cost of living in the country (especially vis a vis housing costs), more expensive for many residents, but also substantially increase the difference in living costs between it and other parts of the country. This could exacerbate the outflow of companies (concerned, among other reasons, about competing for employees) and residents to lower-cost states. As an example, Texas has been actively trying to recruit CA companies to relocate for years, and often crows about its success in doing so. The Texas pitch revolves around its much lower housing costs and the absence of state income taxes – the changes to federal income tax law only widen the already large cost-of-living differential between the two states as they compete for businesses.

The Bay Area has competed, for years extremely successfully, on the basis of quality of living, as a cultural center and as the nexus of high-tech, bio-tech and fin-tech industry and innovation. However, other metro areas, such as Austin, are increasingly attempting to compete on these bases as well. Washington state, which already has a thriving, long-established high-tech center in Seattle, also has no state income tax. Other places - Canada, the research triangle in North Carolina - are making strong pitches to CA high-tech employers as well.

[Resident outflow from California can be broken into 2 main groups: Those relocating for jobs in lower cost states, and those moving subsequent to retirement, which often involves cashing out of a higher-cost housing market to maximize proceeds and retirement income in lower-cost, lower-tax regions. Looking at the chart above, as pertaining to the outward migration of CA residents, Texas, Washington and to a lesser degree, Oregon and Colorado dominate the first group, and Arizona, Nevada, Florida and Oregon probably dominate as locations for retiree relocation. It's interesting to note that 5 of these states also top the list for states whose residents relocate to California, though in lesser numbers.]

The net result could be an reduced inflow of new foreign residents and residents relocating from other states, as well as a decline in businesses setting up offices here, coupled with an increased outflow of relocating businesses and existing residents – especially the more affluent residents most affected by proposed tax law changes. These 2 dynamics together might have significant ramifications for state and local economies and housing markets. There have been a number of politicians from high-cost-of-living (blue) states, which levy state income taxes, as well as a number of economists and other "experts" voicing concerns regarding the potentially considerable economic effects of a possible exodus of business and population. At the same time, some politicians from lower-cost states have been gloating about enticing such movements.

It is unknown at this point what scale of change may occur and how significant the ramifications might be - we honestly cannot predict the effects. The Bay Area has been a very high-cost area for a long time and still attracted about 600,000 new residents in the past 6-7 years alone. Still, making a high cost area more costly for a large segment of residents is certainly not a positive.

This chart below looks at migration to and from the 5-county SF metro area and other CA and U.S. metros.

According to the New York Times, state governments are already beginning to strategize possible ways around the new federal tax laws, however it is unknown how successful that effort will be in the face of congressional hostility: NYT Article: High-Tax States Plot to Blunt Impact of New Tax Law

Comparative State Income Tax Rates

The chart at the top of this article has been posted to our new analysis on San Francisco and Bay Area demographic trends: Paragon Demographics Report

All our reports and articles can be found here: Paragon Market Reports

The data herein is from a wide variety of third party sources deemed reliable - much of it from national, state and local government data sources - but it may contain errors, and is subject to revision.

© 2018 Paragon Real Estate Group