Elon Musk predicts California bankruptcy! High taxes drive away the "golden goose," Texas becomes the biggest winner

Elon Musk criticizes California’s path toward bankruptcy, where government wasteful spending cooks the golden goose laying eggs. He points out that the Democratic Party is fully controlled by unions and lawyers’ interest groups, and that one-party rule causes politicians to sacrifice productive citizens to buy corruption. California has the highest population outflow in the US, with high-net-worth individuals and companies moving to Texas. Musk has already relocated Tesla’s headquarters to Texas.

Revenue Collapse and the Rigid Death Spiral of Spending

California’s fiscal issues have exposed core problems, which are not about the size of annual deficits but about structural imbalance. On the revenue side, California’s personal income tax heavily depends on a small number of high earners and large corporations. The share of capital gains tax from the wealthy in California’s personal income tax is increasing, and these individuals’ income is highly tied to the stock market and tech industry. If the US stock market declines or tech companies cut salaries and lay off workers, tax revenue will collapse simultaneously, leaving the state with almost no buffer.

On the expenditure side, California’s civil service system is large, with pensions and healthcare as systemic commitments written into law. No matter how bad the economy gets, these cannot be reduced or cut. As a result, income can fluctuate greatly, but expenditures can only grow. Worse, California lacks counter-cyclical adjustment capacity: during prosperity, it expands staffing and benefits; during downturns, it cannot quickly contract and can only rely on debt or tax hikes to sustain itself.

This structural imbalance is known in economics as the “income pro-cyclicality, expenditure counter-cyclicality” worst-case combination. When the economy is good, tax revenues surge, and the government expands spending and promises new benefits. When the economy turns sour, tax revenues plummet, but expenditure commitments cannot be reduced, and deficits must be covered by borrowing. Over time, debt snowballs, eventually reaching unsustainable levels.

Musk believes that all of this is inherently unavoidable from the start; it is not the fault of Neuson or any individual. The Democratic Party is completely controlled by interest groups (unions and litigation lawyers), and California is effectively a one-party state. Any politician nominally in charge of California has only two choices: 1) stop funneling money recklessly to interest groups (public sector unions and law firms); or 2) sacrifice the most productive citizens, using them to pay for corruption.

Three Fatal Flaws in California’s Finances

Revenue Fragility: Highly dependent on a small number of wealthy individuals and the tech industry; stock market downturns cause tax revenue collapses

Rigid Spending: Pensions and healthcare written into law, cannot be reduced even in economic downturns

Lack of Adjustment Capacity: Expands during prosperity, cannot contract during downturns, only borrows

Political Deadlock: One-party rule controlled by unions and lawyers, reform is impossible

They will always choose the second path, because choosing the first would lead to failure in party primaries. Only bankruptcy can force the state onto a correction path, but until then, they will continue to feast on the golden geese that keep laying eggs. Although this argument is extreme, it reflects the dilemma of structural reform under democratic politics: reforms that threaten vested interests often cannot win elections, so politicians maintain the status quo to stay in power.

Chain Reaction of Wealthy People Voting with Their Feet

In recent years, California has seen a continuous outflow of high-net-worth individuals. The reasons are simple: high taxes and high uncertainty. As personal income tax and capital gains tax keep rising, and policies change frequently, the most rational choice for the wealthy is not to complain but to move to low-tax states like Texas and Florida, taking their tax base with them. The same logic applies to corporations—especially tech and manufacturing firms—where California means higher labor costs, stricter regulations, and more complex compliance risks.

The result is: headquarters moving out, R&D dispersing, and new investments prioritizing other states. California is now the state with the largest population loss in the US, with most of the movers following Musk to the conservative stronghold of Texas. The most damaging aspect of this migration is that those leaving are often the ones generating taxes and jobs; those remaining are more dependent on public spending. This demographic shift further worsens fiscal conditions, creating a vicious cycle.

Musk himself has voted with his feet, relocating Tesla’s headquarters from California to Texas. This is not only symbolic but also substantive in terms of tax base loss. Tesla, valued at hundreds of billions of dollars, moving its headquarters means a significant loss of corporate income tax, executive personal income tax, and related employment opportunities. As iconic Silicon Valley companies begin to leave, this signaling effect could trigger more firms to follow.

Data shows that between 2020 and 2023, California experienced a net outflow of over 500,000 people. Although California’s total population is close to 40 million, losing 500,000 may seem small, but these outflows are mainly middle-class and above taxpayers. Even more concerning is the composition of incoming populations: primarily low-income immigrants and welfare-dependent groups. This population replacement reduces California’s tax capacity while increasing expenditure demands.

Vicious Cycle of Spending More, Achieving Less

California’s logic of spending is deeply flawed. Whether it’s homelessness, public safety, or public health, once defined as a “crisis,” more funding can be justified, but the link between funding and results is weak. Failed projects are rarely cut; instead, they are continued under the pretext that “the problem is not yet solved,” leading to a vicious cycle of increased spending, worse performance, and weaker accountability. Over time, fiscal burdens only grow heavier.

A typical example is California’s spending on homelessness. Over the past decade, hundreds of billions of dollars have been poured into related programs, yet the homeless population has not decreased; it has increased. Currently, California accounts for nearly 30% of the homeless in the US, far exceeding its share of the population. Large sums flow into nonprofits, social service agencies, and government departments, but the actual effect is minimal. This “input-only, output-ignored” logic is at the core of Musk’s criticism.

In reality, California will not go bankrupt like a business, but in economic substance, it may fall into a “bankrupt state”: long-term fiscal austerity, shrinking public services, increased taxes to fill deficits, accelerating tax base outflow, and mounting debt and pension pressures that will eventually be passed on to future generations. This slow bankruptcy, lasting decades, is more terrifying than sudden collapse because it erodes the quality of life of Californians over time.