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California’s independence from the federal government — and housing

California’s independence from the federal government — and housing

first tuesday readers mostly consist of real estate professionals — specifically, California real estate professionals. Why does California need its own journal for real estate? Because when it comes to housing and other economic matters, national averages just won’t do. California is becoming less and less like the rest of the nation with each passing year, offering real estate agents and brokers a unique set of challenges, and rewards.

Of all the states, California is the fourth least dependent on the federal government for money, according to WalletHub. On the other end of the spectrum, southern states like Kentucky and Mississippi top the list for most dependent on the federal government.

How much does California receive from the government?

Per person, the average Californian receives about $9,600 from the federal government, lower than the national average of $10,200. This average figure varies significantly by region of the state, with California’s most rural counties averaging $10,000 or more per person and some coastal counties like Orange County and San Luis Obispo averaging less than $7,000 per person.

As of 2015, the federal government gives the state approximately 99 cents for every dollar the state sends back to the federal government. This classifies California as a donor state, meaning the federal government gets more money from California than the state gets from the federal government, according to California’s Legislative Analyst’s Office. This status caused an uproar earlier in 2017 when President Trump threatened to withhold federal funding due to sanctuary cities’ refusal to comply with orders to increase vigilance around undocumented immigrants.

The gross domestic product (GDP) produced by California and other states directly correlates with dependence on the federal government.

California has the highest GDP of any state and the sixth highest in the world. States with relatively low GDP tend to have a higher dependence on the federal government, as less GDP makes for less tax revenue to go around.

How is federal revenue spent?

The state’s relatively low take from the federal government also has to do with demographics.

California’s population skews younger, with a median age of 35.8 compared to the U.S. median age of 37.6, according to the U.S. Census. 12.5% of California residents are 65 years or older as of 2015, while 14.1% are 65 or older nationwide.

According to California’s Legislative Analyst’s Office, the state’s younger population draws less from the federal government per individual due to the federal benefits members of the older population receive. This is played out across the state, as rural counties with higher per-person expenditures from the federal government are home to older populations.

Despite the relatively small population of older folks, the biggest destination for federal tax revenue is Social Security and Medicare in California, according to the Legislative Analyst’s Office. The top payments of federal dollars in the state are:

  • $82.6 billion to Social Security recipients;
  • $69.2 billion to Medicare recipients;
  • $54.7 billion to state health and human services;
  • $33.8 billion to private entities (such as contractors) and universities; and
  • $19.4 billion to individuals as wages or pay for current and former federal employees, including U.S. military.

These payments from the federal government, along with other, smaller payments, totaled $376 billion in 2015, slightly less than what the state — mostly, individuals living in the state paying federal income taxes — paid the federal government that same year.

What California’s independence means for housing

All this revenue sent from Californians to the federal government comes from taxes.

Direct tax revenue comes from two main sources:

  • income from a job; and
  • capital gains from the sale of an asset, like property.

The more money you make, the more taxes you pay — and Californians pay a lot of taxes.

State tax rates are pretty high, compared to the rest of the nation. But the state also produces so much federal tax revenue relative to its population due to its high-paying jobs and high-priced real estate market.

High home values are exciting, on the surface, for real estate professionals. High prices mean higher fees and incomes for real estate agents and brokers.

But California’s high prices mean something less exciting: aside from plenty of taxes, lower sales volume, less construction and a tepid homeownership rate are all results of unstably high home prices.

The cost of land is excessively high here, especially in California’s exclusive coastal metro areas. Low-density zoning makes building to meet the needs of our ever-rising population nigh on impossible. Since demand only keeps increasing, prices continue to rise due to the lack of inventory available.

For a peek into what this situation looks like for real estate agents, consider San Francisco, infamous for its restrictive zoning and low inventory. Here, the average agent sells fewer than five homes a year. These homes are more expensive than average, and the result is an annual income of around $80,000 for the average agent, right in line with the area’s median income. But when this income is dependent on just four or five deals a year, a spate of bad luck or bad listings can be decimating.

The solution? More reasonable land costs for coastal California, achieved by loosening zoning, smoothing the permitting process and revising costly California Environment Equality Act (CEQA) barriers to building. Removing these barriers will open up more opportunities for building in the most desirable areas, near the jobs and amenities plentiful across the state.

California has a lot of good things going on, including all the factors that make up its high contribution to the federal government. Fix the housing shortage, and it will be the best place to do business as a real estate professional by far.


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