SACRAMENTO, CA—Last week, the California Department of Finance released figures showing that the number of California residents moving out of the state exceeded the number of individuals moving in. While the overall population increased due to foreign immigration, domestic migrants on net left the Golden State. This is hardly a surprise given that California continues to foster an economic climate that’s unfriendly to entrepreneurship.

According to PRI’s U.S. Economic Freedom Index: 2004 Report, co-authored by PRI’s Director of Business and Economic Studies Lawrence J. McQuillan, California ranked second-worst among the 50 states based upon how friendly or unfriendly their policies were toward free enterprise and consumer choice. The Index found that California’s heavy regulatory burden and punitive tax system discouraged entrepreneurship and restricted consumer choice. This has been costly for Californians.

According to the Index, if California was as free as Kansas, the best state in the rankings, each Californian would see their annual income increase by a sum of $1,180. Not surprisingly, the weight of this “tax” correlates with population migration patterns across the country.

The Index looked at the rates of population growth for the top 20 and bottom 20 states in the Index. It found that the top 20 states saw an average increase in population, while the bottom 20 states, including California, saw a decrease. This shows that states that foster economic freedom by lowering taxes, cutting government spending, and reducing regulations will be able to create jobs and strengthen their economies. States that create these opportunities will see an influx of new residents.

On the other hand, states that continue to expand government and punish hard-working taxpayers will eventually experience a population exodus and dwindling economic growth.

The Department of Finance figures showed that in 2005, California had a domestic net loss of 29,000 people—the first time the state lost residents since 1994. But back then the state was in a recession, and was adjusting to a number of military base closures, layoffs in the defense sector, and a slumping housing market.

In contrast, 2005 was a banner year for California: wage and job growth increased by 1.4 percent; the median housing price reached $550,000—a record setting level; and state tax revenues poured in, exceeding estimates by $2.8 billion. With such a rosy picture, California should have been the population magnet it has always been, but it wasn’t. Instead, Californians were moving to Nevada, Arizona, and Texas.

One reason is the state’s particularly punitive personal income tax structure. Its seven brackets, ranging from 1 percent up to 10.3 percent, are among the steepest of all 50 states, penalizing individuals for earning a decent salary. For example, a single individual making $50,000 is taxed over six brackets, reaching the 9.3 percent bracket at an income of just under $42,000. The 10.3 percent bracket—affecting annual incomes over $1 million—is the highest marginal tax bracket of all 50 states. This discourages entrepreneurship by removing capital from those who are most likely to employ others. Further, since many proprietors file their business taxes as individuals, the punitive tax structure negatively impacts the growth of small businesses, limiting their ability to expand and employ more Californians.

Besides the tax structure, California has a laundry list of unfriendly economic policies. These include: a business tort climate that encourages frivolous and costly lawsuits, strict land use and zoning rules that limit property rights; draconian environmental laws that slow down construction; and a fiscal situation that has run up the state’s credit cards.

There’s an old adage that people vote with their feet. Based on the recent figures, it seems that people are voting “no” on California. The state’s leaders better take note and begin to reform California before more ask, “Which way to Las Vegas?”

Anthony P. Archie is a Policy Fellow in Business and Economic Studies at the California-based Pacific Research Institute. He can be reached at aarchie@pacificresearch.org.