How a Market Tumble Affects California

“Sell off!” “Crash!” Investors bracing for “uncertainty.”

After plummeting early this week, Wall Street rallied Tuesday, recovering some, but not all, of what had been lost. What implications does the drop have specifically for California?

In an interview Tuesday afternoon, Annette Vissing-Jorgensen, a professor of finance at the University of California, Berkeley’s Haas School of Business, put the market decline in context for the Golden State.

Here are some things to keep in mind:

When the stock market goes down, the amount of money that Californians who sell stock must pay in capital gains taxes also decreases. The state’s tax code is very progressive, which, in this case, Vissing-Jorgensen said, compounds the problem.

California has one of the highest top tax brackets in the country, and the state relies heavily on those top earners to fill its coffers. (In 2014, the top 1 percent of earners paid 48 percent of all state income taxes in California, according to a 2016 article in the Economist.)

“Since the top 1 percent of Californians own a lot of stocks, a stock market decline that results in lower capital gains could have a disproportionately large impact on California — and its state budget,” Vissing-Jorgensen said.

Tech companies like, say, Apple, tend to sell products known as “consumer durables” — products like an iPhone that do not have to be bought frequently because they last for a long time. When people are feeling strapped, they tend to cut back on buying those types of products.

Those companies tend to be “high beta,” Vissing-Jorgensen said, meaning that tech stocks move more than “one for one” with the stock market. Companies like Apple, she said, have a beta above one, meaning that a 10 percent drop in the market tends to be associated with a larger than 10 percent drop in their stock prices.

“The industry composition of our businesses matters because some industries like tech are more affected by the underlying economic drivers of the stock market decline,” Vissing-Jorgensen said.

All that said, Vissing-Jorgensen urged people to keep things in perspective.

“The stock market has declined, but it’s a pretty modest decline compared to how much the run up has been,” she said. “It’s now basically flat for this year, but it still went up a huge amount last year.”