The Economics of Splitting California

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Would six separate states be better than one?

That is the question Silicon Valley venture capitalist Tim Draper is aiming to have placed on the November 2014 ballot. Californians will have the opportunity to answer by voting in favor of or against Initiative #13-0063 – better known as the “Six Californias” Initiative – if 807,615 signatures are collected in the next 18 weeks. While critics view this proposal as an unrealistic publicity stunt, it is difficult not to consider what the division of California would mean.

From a local government standpoint, it can be argued that the six new states would be better represented and be more suitable to manage the ever-increasing debt the state has accumulated over the past decade. As Travis H. Brown states in his most recent Forbes column:

“…the initiative would 1) proportionately distribute California’s debts based on population, 2) end all tax collections and spending by the existing State of California, and 3) create new, more representative governments that would determine and set changes with respect to taxes, spending, and other public policies for their new state.”

These are all changes from which California residents could greatly benefit, regardless of region.

But what about the economics of these new states? After our team re-created the six proposed states based on county data (income, population, and per capita income) from the Bureau of Economic Analysis (BEA) and U.S. Census Bureau, we found that splitting California would create six very different states, especially in terms of total population and income per capita.

The proposed states of West California – the new home of Los Angeles – would have the largest population (over 11.5 million in 2012; roughly the size of Ohio), and Silicon Valley would have the highest income per capita ($58,870 in 2012; roughly on par with Connecticut) of the six states. The smallest state would be Jefferson with a population under 1 million or roughly that of the state of Delaware. Jefferson would also be the state with the lowest income per capita. Some of the states would be overwhelmingly rural such as Central California and Jefferson, while states like Silicon Valley and West California would be dominated by the cities of San Francisco and Los Angeles, respectively. The diversity amongst the new states makes it clear why breaking up California makes sense. It is hard to see how the current one size-fits-all set of state government policies is appropriate for a state with so many strong regional differences.

Our analysis also reveals the differences in the economic trajectories of the new states. The proposed state of Jefferson, for example, had the highest increase in real income per capita – 17.22 percent – over the last decade. In contrast, Silicon Valley only had a 4.59 percent increase in real income per capita over the same time frame, despite the fact that Bay Area’s proposed state would be the 3rd wealthiest state in the nation. Furthermore, some of the proposed new states are experiencing dramatically different rates of population growth. South and Central California are still growing their populations rapidly, while West California is hardly growing at all.

With such differences in population, per capita income and grow trends between the different regions of California it is no wonder the state has become ungovernable. People living in a large, rapidly growing and overwhelmingly rural state demand different government policies than a population living in a predominantly urban environment with little or no growth. This is before one considers differences in climate, water resources and cost of living. Giving more autonomy to the different regions of the state would allow them to better set government policies based on their unique circumstances.

Residents don’t choose a big state. They choose Santa Barbara, San Francisco, or Sonoma. So provide your signature to Initiative #13-006 because a government close to its people is typically a better performing one.