The Tide Rolls Out on California’s Budget
There are things in the world that concern us. That’s an unusual thing for financial advisors to admit.
Advisors are (or should be) continuous students of the market. For many, it’s probably a fair assumption that we aren’t easily shaken due to personal experience, knowledge of market history, and understanding of investor psychology.
Politics in the headlines? “Markets tend to look past it.”
Geopolitical conflict? “Policy responses should follow.”
Recession risk? “Might be priced in.”
Stocks are near all-time highs as earnings continue to grow. We don’t worry so much about the stock market day-to-day. However, one thing is top of mind that we are trying to navigate: the migration of individuals and businesses leaving high-tax states.
Many households rely on state and local services to survive; That money needs to come from somewhere.
Here in California, there is a dramatic shift in population, wealth, and corporate headquarters well underway. Some in the media have referred to it as an ‘exodus’.
It can be politically appealing to propose increasing taxes on the wealthiest. The practical question is whether they’ll simply tax their tax dollars and leave.
The remaining residents (us included) are wondering who’s going to foot the tax bill. It has investment ramifications as well.
“You cannot tax a city into prosperity.”
-Dan Loeb
Intense debates over taxation and regulation (especially in high-cost, high-tax regions such as New York, Washington State, and California) influence where high earners and businesses choose call home.
Cities and states are required to compete for talent and capital. COVID reminded several industries that talent is mobile and anyone with home internet can be an employee…No state has a divine right to success. – Jamie Dimon, JP Morgan’s 2026 Shareholder Letter
In California, the top 10% of taxpayers contribute 75% of the tax. As that group shrinks, budgets get more sensitive, and the tax burden falls on the remaining residents.
Over the last decade, several large companies have moved their headquarters out of California. Tesla, Oracle, Chevron, and Charles Schwab have relocated to Texas, citing a business environment they view as more favorable. Texas has reported a $25 Billion budget surplus in 2025, while California’s deficit grows.
Separately, the state faces large long-term obligations: CalPERS has reported substantial unfunded liabilities, and CalSTRS has also reported significant funding gaps. A smaller population means fewer people paying into those pension systems.
Put simply, these are real future costs that must be somehow financed or renegotiated over time.
Why Killing the Golden Goose is neither wise nor a solution
Some argue these deficits could be addressed primarily through substantially higher taxes on ultra-high-net-worth households. The challenge is feasibility. On paper, the state’s “Billionaire Tax” would raise nearly $100 Billion. This would cover less than 4 months of state spending.
And because much of this wealth is held in businesses and stocks rather than cash, forcing rapid liquidation could have broad market spillovers. Stock, venture capital, and real estate markets would see forced selling, potentially driving prices down and reducing new investment.
Ultimately, the state’s obligations must be financed regardless of which taxpayers remain. If the tax base narrows due to outward migration, a larger share of the funding burden may fall on middle-income households and small businesses.
What can you do about it?
Beyond elections and policy debates, individual investors have a limited ability to influence state finances directly, mainly through state-issued bonds (aka municipal bonds). Here are a few practical considerations when investing in municipal bonds:
1. Keep municipal bond maturities short. Cities and counties are more likely to pay off their short-term debts than long-term ones. Shorter-duration bonds tend to be less volatile and sensitive to changes in interest rates.
2. Always check the Municipal bond’s credit ratings. Some counties are more productive than others from a tax standpoint. Junk bonds may pay a little more now but the credit risk for another 1% in yield may not be worth it. Credit downgrades (increasingly likely) usually push bond prices down.
3. Try to own revenue bonds (rather than general obligation “trust me” bonds). Toll roads and bridges are an easy example; every car pays a toll which is used to repay debt. The Golden Gate Bridge was built in the 1930’s and the debt was paid off by 1971. General obligation bonds aren’t tied to any service, and should be viewed with more scrutiny.
4. Current and former state employees should diversify their retirement. CalPERS and CalSTRS are generous pensions… but consider investing in other places. IRAs, brokerage accounts, and other investments are available that aren’t tied to state finances. No great business relies on a single line of income, and retirees are no different.