Governments that have built their budget strategy around property tax and sales tax increases could have long-term financial problems.
By William Fulton, Special to CalMatters
William Fulton, a former mayor of Ventura, is director of the Kinder Institute for Urban Research at Rice University and editor of California Planning & Development Report, email@example.com.
In 2020, with COVID-19 driving all that U-Haul traffic out of the Bay Area, California’s population – currently hovering at just below 40 million people – probably went down. Even Elon Musk apparently moved to Texas.
When was the last time this happened?
The answer is never.
In 170 years since statehood, California’s population has always gone up. Even during the Great Depression, the state added population. Since 1940, it’s grown, on average, by a half-million people per year. Suddenly, since 2017, that ever-increasing population growth has come to a crashing halt.
Why? California has been losing population to other states for many years and more than made up for it with international immigration and natural increase. But immigration has tailed off, for a variety of reasons. And natural increase, which was in turn driven by high fertility rates among immigrants, has also tailed off, in large part because what might be called the “immigrant Baby Boom” of the ‘70s through the ‘90s is long since over. And now all those Bay Area U-Hauls are headed to Austin.
Yet California is built in so many ways on population growth. So much of how the state works – and especially how its local planning, development and budgeting works – is based on the assumption of ever-increasing population. So if growth stops, how will California change – or not change?
First, the end of population growth does not mean the end of real estate development. In regions with no population growth – Detroit, for example – real estate development has still occurred. In slow-growth cities of the Northeast and Midwest, this growth has occurred in the suburbs at the expense of the cities. But California might be different. Our urban neighborhoods have been very crowded for two generations. So even if they empty out, we might see gentrification that accelerates even while population declines, as affluent gentrifiers replace large immigrant families.
Second, the backlog of housing need is likely to remain for a while even if population growth stagnates. NIMBYs are sure to argue that the end of population growth means there’s no housing crisis. But home prices are still high, with the average price in the Bay Area still at more than $1 million. The reason is simple: California has under-produced housing since the late ‘80s. It will take years – if not decades – of aggressive housing production to reverse that trend.
Third, and potentially most important, local governments that have built their whole budget strategy around growth are likely to suffer. Many cities and counties in California have constructed their whole approach to budgets around two things: 1. ever-increasing sales tax, and 2. the front-end property tax increases and impact fee revenues that come with new residential construction. If population growth goes away permanently, sales tax may flatten and the front-end tax and fee revenues will likely stagnate. Cities will have long-term financial problems.
In other words, the future looks far different from the past – and California isn’t ready for it.
Cities and regions in the United States that have experienced long-term population stagnation often fall into a vicious cycle of population loss followed by tax increases to make up for the lost tax base followed by more population loss because of higher taxes. I saw this in my native Upstate New York in the ’70s. California already shows signs of this cycle.
But some regions – Pittsburgh and St. Louis, for example – prosper because they acknowledge that their population has stopped going up and instead focus on increased wealth of the region instead.
California still has plenty of wealth. But to thrive in the future, the state may have to figure out how to focus on wealth creation – and equitable distribution of wealth – rather than simply relying on sheer population growth. After 170 years, it might be a long and painful journey before California finds its way in this new world.
William Fulton has also written about an important part of the solution for the state’s housing crisis.