California brags about its donor state status, that is, it forwards more in tax dollars to Washington than it gets back in federal spending. But that’s changed.
According to the Rockefeller Institute of Government, California’s balance of payments with the federal government – the net difference between federal revenue collected from the state and the entirety of federal spending within that state – is negative. Three times between 2015 and 2023, California took in more than it sent to the federal government when emergency COVID spending is included.
This isn’t the story being told by official Sacramento, though.
“In case you missed it,” Gov. Gavin Newsom’s office said in June, “California is the biggest ‘donor state’ in the country — providing around $83 billion more to the federal government than it receives from the federal government — nearly three times as much as the next biggest ‘donor state.’”
June also happened to be the month that Newsom threatened to withhold tax payments to Washington because the administration was considering cutting spending in the state.
U.S. Treasury Secretary Scott Bessent’s response was to suggest that Newsom was “threatening to commit criminal tax evasion.”
In a world that comes at us faster than ever, what is true today might not be true tomorrow. Some facts are permanent and universal, but data can be like the wind, constantly changing direction and speed depending on shifting conditions. Count California’s claim of being a donor state among the latter.
In 2020 alone, the federal government spent roughly $280 billion more in California than it received in tax revenue from residents and businesses, says the Rockefeller Institute of Government. The next year, the figure fell to a little more than $197 billion, and then in 2023, to $13.4 billion.
Maybe if there had been no COVID outbreak, California would have continued to be a donor state without interruption. But California workers living under the strictest COVID lockdown in the country were denied the ability to earn taxable income while residents elsewhere were back on their jobs, and Sacramento was happy to rake in tax revenues generated by those who were allowed to return to work.
Generally speaking, states where progressive politics dominate are prone to claiming that they are propping up the rest of the country. Progressive apologists, such as economist Paul Krugman, do the same. He has eagerly argued that “California is literally subsidizing the rest of the United States, red states in particular, through the federal budget.”
But California’s “donations” to the federal government aren’t quite what they used to be, and might not be for a while. The very people who pay those taxes are fleeing. According to a 2024 report from the nonpartisan Legislative Analyst’s Office, “California continues to lose taxpayers to other states.”
“The number of taxpayers who move out of California each year ticked up in 2020 with the beginning of the pandemic,” says the LAO, while “at the same time, the number of taxpayers who moved to California remained flat.” The trend continued in 2021 and 2022.
Put another way, California loses taxpayers more frequently than any other state, “on net,” one “every 1 minute, 44 seconds,” says the National Taxpayers Union Foundation.
The losses that began during the pandemic have been primarily among “middle- and higher-income households have moved to other states,” says the LAO, “meaning the effect on state revenue has been greater because these tax filers tend to make larger income tax payments.”
If the trend continues, the foregone taxes will “be a drag on long-term revenue growth for the state.”
And why are the mid- and high-income earners leaving? Public policy choices have been making the California experience a bitter one for many.
While those who have left, as well as those who will leave in the future, will no longer be paying state taxes, they will still be paying their federal taxes – but from other states, meaning that in any donor-recipient calculation, those states are credited with the contributions, which might turn some of them from recipients to donors.
It is a fact that no state sends more tax dollars to Washington than California. No one will deny that the state is an economic powerhouse. But public policy has consequences and if the harm that’s being done in Sacramento, county board rooms and city halls continues, it will eventually render both of those statements untrue.
Kerry Jackson is the William Clement Fellow in California Reform at the Pacific Research Institute, a California-based think tank advocating free-market policy solutions.
