McNellis: Could California Flame Out?

By John McNellis

The phone rang early yesterday. “Well, our center’s still standing,” my partner said.

“Whoa.”

“The fire’s only a couple blocks from us, the whole town of Lakeport’s been evacuated. I think we’ll be ok, but it’s out of control.”

That fire is still raging as of this writing, the town is empty, the stores are closed, our shopkeepers are suffering daily losses that, while nothing compared to the loss of life and home that California’s wildfires are claiming, will never be recovered.

Not so very long ago I thought that global warming was a tragedy of epic proportions, but that it would have at least a few winners: Southern California might become truly unbearable, but Eureka would be the next Laguna Beach. I was wrong again. Writing in the New York Times about Montana, Sara Vowell summarized it like this, “Here in the Mountain West, there are no longer four seasons, only two: winter and wildfire.”

While not that apocalyptic, California’s wildfire season has been starting earlier and ending later. In the past, the season lasted a couple months, August through early October. This year it began the first week of July and last year—the deadliest and costliest wildfire season ever—it went on forever, finally petering out in the north in November and still devastating the south as late as December. The Thomas fire in Southern California, the largest single fire ever, broke out on December 4th.

In California, we pay the highest taxes in America. No other state has a base sales tax as high as our 7.25 percent nor does any state match our top marginal income tax rate of 13.3 percent (Hawaii’s a distant second at 11 percent). One resigned pundit called it a “Shangri-La tax,” the price we must pay to live in the Golden State. And thanks to what passes for political brilliance in Congress, Shangri-La became way more expensive as of January 1st when the Republicans eliminated the deductibility of state income taxes at the federal level, smacking the high-tax democratic states they already had no chance of winning. All things being equal (they never are), a rich liberal will pay another 6.5 percent or so in federal taxes for the privilege of living in California this year.

Thus far, the vast majority of us are staying put, tax increases notwithstanding. According to the Legislative Analyst’s Office, the California Legislature’s non-partisan fiscal advisor, California lost about a million residents to other states from 2007 to 2016 (5 million in, 6 million out), a low population loss by historic standards. Of interest—and not surprising given our cost of living—the out-migration was greatest among the least educated. In contrast, the state had net positive in-migration among the affluent ($110,000 plus annual incomes) and those with graduate school levels of education.

These migratory patterns are consistent with the notion of the state as a wickedly expensive Shangri-La. But what happens if the state loses that allure? What happens when the highly educated affluent decide that California is more akin to Pakistan than paradise? Or that its beaches and Sierra Nevada sunsets are no longer worth its housing costs and congestion?

I asked Ken Fisher about his decision to relocate his company Fisher Investments, a financial advisory firm with a $100 billion dollar portfolio, out of California.

“How did you happen to choose Camas, Washington for your new headquarters?”

“Once we decided we had to get our employees out of California, we went about our search systematically. We wanted them to get the maximum value from their income and, at the same time, live in a pleasant town with good schools. We chose Washington because it has no state income tax. Then we focused on Camas because it is a small, affordable town with a terrific school system; its graduating seniors are at the top nationwide with their SAT scores. And the town is just across the Columbia River from Portland. This was important because we need close proximity to a first-rate airport and Portland International is among the best in the country. There’s another benefit to Camas. Oregon has no sales tax, which means Camas residents can hop across the river to do their major shopping at a significant discount.”

I came away thinking Fisher is not on the Forbes 400 list by accident and wondering whether Fisher Investments would prove another outlier in what thus far has been a trickle of corporate departures from California or become the lead steer in a growing exodus. To that point, I noted that Fisher’s latest book (he’s written 11) is Beat the Crowd: How You Can Out-Invest the Herd by Thinking Differently. He certainly beat the herd out of California.

California isn’t going to solve global warming, but if it wants to retain its affluent and educated, it just might consider lowering taxes, putting its infrastructure dollars into something other than a bullet train to nowhere and seriously attempting to make its housing more affordable. More specifically, resurrecting Scott Weiner’s Senate Bill 827 would be a great start on the road to affordable housing.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.

Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.

mcnellis-book-coverTo read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.