Cato’s Project on Poverty and Inequality in California

In the year since, California has made progress on some issues, but it has made serious missteps as well. As a result, California continues to fail to lift millions of its citizens out of poverty or to enable every Californian to fully participate in the state’s economy.

California’s poverty rate remains the highest in the nation; once taxes, benefits, and the cost of living are fully accounted for, there is more poverty than in states such as Louisiana or Mississippi. Roughly 5 million Californians live below the poverty level, which represents 13.15 percent of the state’s total population. On the surface at least, this looks like progress, a decline from 2019 to 2021. But any improvement appears to be from one‐​time federal and state pandemic payments and the short‐​lived expansion of the federal child tax credit, meaning that any progress is likely to be unsustainable.

Overall, California made significant progress on housing issues and pressed forward with criminal justice reform. But the state did little to fix its troubled education and welfare systems. And the state not only failed to reduce regressive business regulation; it passed even more burdensome regulations that will fall heavily on small business and entrepreneurs.

Fortunately, in the year since we issued our report, California has begun to address the excessive regulation that has limited supply for years. Starting with SB 9 and SB 10, which legalized duplexes statewide in 2021, and continuing through AB 2097, which eliminated parking minimums within half a mile of public transit this year, the legislature has steadily whittled away at exclusionary zoning restrictions. It also began to weaken the California Environmental Quality Act, which has been used to block so many new housing projects. In fact, this year alone, the legislature passed 41 pieces of pro‐​housing legislation. Many of these were in line with recommendations that the California Project had made.

There could still be more positive action to come. The Assembly has passed three bills that are now awaiting approval from the Senate Committee on Appropriations. AB 2221 aims to accelerate the process of approving the development of accessory dwelling units to add much‐​needed density and variety of housing types. AB 2234 was introduced to require local governments to adhere to strict timelines when approving or denying building permits to increase government accountability. AB 2656 would prohibit erroneous claims of California Environmental Quality Act violations from stopping housing developments.

It hasn’t been all good news, though.

Despite this positive action from the state legislature, local governments have continued to resist efforts to build more housing in their communities. For example, in 2021, Gov. Gavin Newsom signed legislation requiring local jurisdictions to develop a detailed forecast of their housing needs and set out plans for how they will provide that housing, including plans to remove barriers to new construction such as exclusionary zoning, by February 2022. But some 190 cities have failed to submit their housing elements for approval, including a shocking 90 percent of Southern California municipalities. How the state government will respond to this local defiance remains to be seen. But as Santa Monica has witnessed, there is sure to be an increased use of the Builder’s Remedy which allows developers to bypass local approval when jurisdictions refuse to comply with their legislature‐​prescribed housing quotas.

Moreover, many of the bills that passed were loaded down with unnecessary regulations and other requirements. For instance, legislation (AB 2011) that would make it easier to convert some commercial sites to housing included requirements for developers to pay union prevailing wages.

Despite the progress it has made, California still needs to go much further if it is going to bring down housing costs.

The state also has a long way to go to deal with its growing problem of homelessness. Roughly half of all unhoused homeless reside in California, and the pandemic only made the problem worse. The state and localities responded with emergency measures, such as using vacant hotel rooms as shelters. But the state has thrown money at the problem for years without making substantial progress. This year the state continues down the same path, appropriating another $7.2 billion for various programs to help the homeless.

Perhaps even more concerning, more and more localities have stepped up efforts to use the police as an anti‐​homeless measure. As we noted in our report, such methods not only fail to solve the problem, but may make long‐​term homelessness even worse.

Recently, however, the issue has become highly politicized, complicating efforts for further reform. Still, the legislature passed some important reforms this year. Perhaps one of the most significant bills was SB 731, cosponsored by Sens. Sydney Kamlager (D‑Los Angeles), María Elena Durazo (D‑Los Angeles), and Steven Bradford (D‑Los Angeles), based on one of the California Project’s recommendations. It establishes a simpler mechanism for Californians to seal their past criminal records. Given that the existence of criminal records can bar individuals from employment and housing, it is significant that those who become rehabilitated will have the ability to immerse themselves in society once again without the constant threat of the penal system.

The legislature passed several other criminal justice reform measures as well, notably repealing laws against loitering (SB 357) and jaywalking (AB 2147), while successfully resisting efforts to roll back previous reforms by voting down attempts to reduce the felony threshold for grand theft and shoplifting offenses (AB 1603). Additionally, the legislature passed two important bills related to diverting individuals from the state’s prisons: Gov. Newsom’s CARE Court Program (SB 1338), which is focused on mental health, and the Alternative to Incarceration bill (AB 2167), which requires the court system to consider diversionary alternatives in the sentencing process. Our recommendations suggested greater use of such restorative justice approaches.

As good as this record was, California missed opportunities to go even further. The legislature took no action to legalize the possession of drugs other than marijuana (as other states such as Oregon have) or to legalize sex work (other than the aforementioned loitering repeal). In 2019, Oakland became the second city in the United States to decriminalize psilocybin, yet the Psilocybin Legalization Initiative failed to make it onto the 2022 statewide ballot. The legislature chose to instead press forward with criminalizing tobacco products and tobacco alternatives. And Gov. Newsom vetoed legislation that would have permitted localities to establish safe injection sites. Additionally, California has kept the marijuana market overregulated, which has kept the drug on the black market and has excluded minorities from entering the industry as equal players.

The type of innovation needed to transform California’s school system is unlikely to occur in a system dominated by a government monopoly. At the same time, it is particularly unfair to low‐​income or minority students to have to attend schools that fail to meet their needs. Yet the state remains wedded to the status quo.

Despite the fact that charter schools in California outperform traditional public schools (despite having more low‐​income students and students of color), the legislature has failed to address provisions in the Local Control Funding Formula that penalize charter schools by capping the amount of supplemental funding that some charter schools can receive for high‐​need students.

The state also continues to have no real movement for greater parental choice and control. A ballot measure that would have established a tuition tax credit program fell short of the number of signatures needed for the November 2022 ballot. Organizers will likely try again for 2024.

Gov. Newsom did veto two pieces of legislation that would have made full‐​day (AB 1973) kindergarten mandatory for all children (SB 70). Given the failures of the state’s education bureaucracy, expanding it to preschoolers seems like a poor choice.

It is disappointing, therefore, that the state has failed to make even modest reforms, instead preferring to throw still more money at the problem. The legislature is considering important legislation by Sen. Sydney Kamlager (SB 996) that would abolish asset testing for CalWORKs. Doing so would encourage recipients to save rather than consume, an important step on the road out of poverty. That legislation has passed the Senate and the Assembly Human Services Committee but is currently stalled in the Assembly Appropriations Committee.

Several localities have experimented with cash benefits, but those have been in addition to—rather than in lieu of—in-kind benefits. Often erroneously billed as a form of universal basic income, these programs have generally been little more than an expansion of the current approach to welfare (albeit with less bureaucracy and fewer strings).

In general, there has been no serious effort to consolidate programs or to move toward cash and away from in‐​kind benefits. Nor has the state taken up other potential reforms, such as incentivizing the use of diversion programs as an alternative to traditional welfare.

However, not only has the state failed to reduce its regulatory burden, but it also has enacted several particularly onerous new regulations in the past year.

Perhaps the most egregious example was the Fast Food Standards and Accountability Recovery Act, which willeffectively allow the state to set wages, benefits, hours, and working conditions for its fast food industry. Another new law (SB 951) would increase paid family leave for families earning as much as $57,000 per year.

These regulations are likely to fall most heavily on small businesses and startups. Minority and low‐​income communities, in particular, could find fewer jobs and economic opportunities.

And while the legislature had the opportunity to pass legislation (SB 980) that would have streamlined the application process for liquor licenses for small businesses, the bill is regrettably stalled in committee. It should be noted, however, that SB 1452 was successfully passed in the 2021–2022 legislative session, but the bill only allotted additional liquor licenses for two of California’s 58 counties.

When it comes to business regulation, California still seems determined to ignore basic economics, hoping that it can continue to ride its natural advantages to maintain economic growth. Maybe it can, although that does not seem like a good long‐​term strategy. In particular, California’s regulatory approach is unlikely to provide for the type of broad‐​based economic participation that will help lift people out of poverty.

In the year following the release of our final report, we have remained in touch with lawmakers, local officials, stakeholders, activists, and others working to reduce poverty and inequality in the Golden State. We plan to keep doing so in the year to come. There is still much work to be done.

To learn more about California’s problems with poverty and inequality and what can be done to help solve those problems, watch Cato’s multi‐​award‐​winning documentary: