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The California Dream Is Dead

Even being in the top 20 percent of U.S. earners doesn’t mean much in the Golden State

In 2015, if your household income was $186,000, you were average. Average, that is, for the upper quintile (20 percent) of earners in the United States, making about 3.5 times the median household income. By all accounts, that should make you rich or really well-off — wealthy, even — according to the standard way we use those terms. You are part of the group that pays a significant amount in taxes, yet you make too much money to benefit from most government programs. You would stand to save thousands of dollars because of the recent GOP tax reform law, and your income tax bill would go up by many thousands of dollars if progressive Democrats successfully expand the welfare state in the future. Supporters of a more robust safety net and more government spending may argue that you can afford to pay more, that you have more than enough money to fund your very own American Dream. But maybe not in California.

California is a model for progressive policies for the rest of the nation, and it’s easy to see the attraction. California is beautiful and diverse, the weather is mostly great, the natural landscape is varied and interesting, and a number of signature American industries call it home. Los Angeles and the Bay Area — San Francisco, San Jose, Silicon Valley, etc. — are both world-class cultural centers and economic powerhouses. Alongside the agricultural sector, these areas produce a large portion of California’s nearly $2.5 trillion GDP, which would make California 5th in the world were it an independent nation. If you’re in the top 20 percent of U.S. earners and you live in California, it’s likely that you live in one of these cities or their surrounding suburbs. San Francisco is famously expensive, in terms of real estate, rents, and general cost of living. Los Angeles isn’t quite the national outlier that San Francisco is, but it isn’t cheap.

Consider this thought experiment: A family of four (two spouses, two children) lives in a median L.A. neighborhood. The couple are in their mid-30s, and they have two young children (say, ages 2 and 4), but both work to support their household. Because they have invested heavily in post-secondary education, having not come from wealthy families, the couple is able to make $190,000 a year, but also has significant student loan debt. One partner has been a Los Angeles public school teacher for over a decade, earned at least one advanced degree, and is able to make around $80,000 a year. The other partner went to law school, and makes a little less than the average salary for an attorney in Los Angeles, coming in at around $110,000 a year.

This family is the poster child for people who are making it, doing well, achieving the American Dream. They should have no problem buying a modest home, putting money away for retirement, saving for their children’s college education, and enjoying some luxuries like family vacations, right?

Maybe not.

Taxes

Taxes can be complicated, but, if this family doesn’t qualify for tax breaks besides for children and student loans (they are still trying to save for a house, so no mortgage deduction), this is what they’d take home:

Out of their $190,000 income, they may pay around $38,000 in federal income tax, $14,000 in California state income tax, and around $10,000 in Social Security and Medicare contributions. They could save up to [$2500 x (their tax rate)] by claiming the student loan interest deduction, but for many people this will only amount to about $500 in tax savings. They also may save a couple thousand dollars in child tax credits. All things considered, though, they are going to bring home less than $130,000. This is still a lot of money for most people, so they should be in good shape.

But something’s not quite right.

If taxes are so high in California — which translates to heavy government spending on social programs — why are so many lower-income Californians leaving this land of sun and opportunity? Why is California ranked dead last in “quality of life” and 32nd overall, by U.S. News and World Report’s “Best States” rankings?

Real Estate

The median value of a home in Los Angeles is $671,000, according to Zillow. Our family of four doesn’t yet own a house, so they may have to save around $60,000-$70,000 in order to eventually buy one. In the meantime, they pay the median rent in Los Angeles, which is around $3,400 a month. Including utilities (which are pricey in L.A.), their monthly housing cost to rent is something like $3,800 a month. That’s $45,600 a year, which brings their remaining expendable income to $79,400 a year.

As Jonah Goldberg argues, those who are less well-off than our fictional family are even more vulnerable to California’s bloated tax, real estate, and utility costs:

According to the standard poverty measure, Mississippi ranks first in the nation with a rate of 20.8 percent. California ranks 16th. The Census Bureau’s “Supplemental Poverty Measure” places California first in the nation with a poverty rate of 20.4, and Mississippi falls to fifth.
Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.
California has some of the highest housing costs in the country. Energy costs, according to a Manhattan Institute study, are as much as 50 percent higher than the national average. A million California households spend 10 percent of their income on energy alone.

If the economic opportunities for a wealthy family, making almost $200,000 a year, are somewhat stymied in the Golden State, imagine what it is like for people making less than half that.

California’s median income is about $65,000 a year.

Childcare

Childcare for our 2 year old and 4 year old in Los Angeles is expensive. Using the averages provided by Business Insider and kidsdata.org, our family is paying something like $2,000 a month for childcare. This leaves $55,400 in the annual budget. Thanks to the government program Head Start, some families can gain access to free childcare from birth to age five, however:

If your family of four makes more than $24,600 a year, you are not eligible for these services. Our wealthy family is more than $150,000 a year over that threshold.

Healthcare

Healthcare is a major economic factor for most American families, and may determine what jobs people take, where they live, and a host of other decisions. Even though benefits are a big part of the compensation package for public school teachers, our teacher and the kids still pay around $2,000 a month for health insurance, according to CALpers.

The partner who is a lawyer has to buy insurance separately in this instance, and if they work at a small firm, they may be buying it all on their own. We’ll wave this for the sake of being conservative with our numbers, but that’s still another $24,000 for monthly premiums off the budget, leaving $31,400 for their remaining annual expenditures.

Auto

It’s very difficult to live in Los Angeles without a car (though many people still have to navigate L.A.’s frustrating public transit system). This is a two-job family, and therefore, a two-car family. They drive two Toyota Camry-like cars on average payment plans, at about $300 a month per car, along with a $200 a month auto insurance cost. That’s $800 per month in auto costs, or $9,600 a year off the old budget, leaving $21,800.

This doesn’t account for the stress and time sink of the worst traffic city in the world, nor California’s outrageous gas prices (which are much higher than any other state besides Hawaii).

Education

The Los Angeles Unified School District is famously bad, but our family may not be able to afford to send their kids to private school — not with their budget. They will send their kids, if they choose to stay in Los Angeles, to a school district that has been sued for violating student’s rights to a fair education over the past few years.

There are good schools in LAUSD, but they tend to be in wealthier neighborhoods, which our family can’t afford, or magnet schools with weighted lottery admissions systems, which our family may not qualify for. Therefore, our fictional family can send their kids to underperforming schools or roll the dice on a lottery for a magnet or charter school, and/or pray their kids are talented enough to get into a selective admissions school.

Bonus Category: Coffee

Because they live in California, our family of four will now have to endure the indignity of this life-enhancing elixir coming with a cancer warning on the side of the cup.

Though this won’t affect our family’s bottom line, it nevertheless represents a cost increase of a different kind.

California, what is wrong with you?

Final Calculations

Our family of four will probably never be able to own a home in Los Angeles, considering that their budget for gas, food, clothing, incidental expenses, and anything else that may arise is a robust $21,800 a year in one of the 10 most expensive cities in the country.

That’s $1,800 a month, which is probably doable, but does not include saving for retirement, saving for the kids’ future college expenses, household goods, or anything like a luxury (vacation, for example) or emergency fund. Once again, this doesn’t allow our fictional family to save for that house they dreamed of buying someday. If they were able to save $500 a month, they could have enough for a down payment after roughly a decade, if housing prices didn’t increase significantly (a 10 percent annual increase in home prices is normal for L.A.). This option would leave them with $15,600 a year for gas, food, clothing, expenses, emergencies, retirement savings, etc.

Ultimately, this median-renting, Toyota-driving, graduate degree-having, tax-paying, rule-following family will have a fine life, if everything goes right. No one should feel bad for them. They get to live in the land of eternal sunshine and low humidity. Maybe home ownership is overrated. There are millions worse off in the United States, never mind the rest of the world. This family is privileged in a number of ways.

We might pause, however, the next time we look at the statistics, classify this kind of family as rich, or well-off, or wealthy, and conclude that they should pay higher taxes taxes to fund the latest government program, wealth transfer, or entitlement.

Indeed, contra Bernie Sanders, there simply aren’t enough “millionaires and billionaires” to cover many of the proposed progressive expansions of the welfare state. Our family of four will pay for the next “free” service or good provided by the government, one way or another. For instance, according to the Los Angeles Times, single-payer healthcare in California would come with a 15 percent payroll/income tax:

A single-payer healthcare system in California — a galvanizing cause among the state's progressive flank — would cost $400 billion annually, according to a legislative analysis released on Monday.
The analysis, released in advance of the proposal's hearing in a key fiscal committee, fills in what has so far been the biggest unanswered question concerning the plan to dramatically overhaul California's healthcare coverage. …
The analysis proposes one scenario in which a new payroll tax on employers — with a rate of 15% of earned income — could supply the new revenue.

Again, it’s been said, and hoped by many progressives, that “as California goes, so goes the nation.” Yet the current reality is that many people flee California for lower-tax, lower-cost destinations like Texas, Florida, Arizona, and Tennessee. Perhaps our fictional family of four will join them, and seek their American Dream elsewhere.

In other words, rich and middle-class families alike are currently able to escape the Golden State for greener pastures, but if the entire nation eventually goes the way of California, where will the kinds of people currently emigrating from places like San Francisco, Los Angeles, and even relatively less expensive areas like San Luis Obispo and the East Bay go then? Maybe people will simply accept that the American Dream has gone the way of the California Dream.

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