I love California from Mt. Shasta to San Diego. I love Yosemite, Sequoia National Park, the Sierras, Joshua Tree, and Idyllwild. It has awesome beaches, great mountains, and great deserts all in the same state. The weather is always spectacular and the cities have tons of fun stuff to see and do. Sure, it has a nasty little earthquake and forest fire habit, but there are lots of opportunities in California that can't be found anywhere else. In addition to these unique aspects, many people have family in California and want to live close to them. Given the plethora of academic institutions there, many subspecialists have found a niche for their practice that cannot easily be replicated elsewhere. Other docs, due to religious, racial, or political issues feel strong ties to the diversity available in California.
Despite all that, I continue to be surprised and appalled at just how difficult it is for a physician to get ahead in California. In email after email I receive from doctors in that great state I hear similar struggles. The original title of this post was “8 Reasons California…” As you can see, it got worse the more I researched and wrote. The economic costs of practicing in California are above and beyond the so-called “Sunshine Tax.” Perhaps the best possible move a California physician struggling with financial issues can make is to move somewhere else. Where should they go? Practically anywhere else would be better from a financial perspective.
12 Reasons Doctors Struggle to Get Ahead in California
# 1 The High Cost of Living
Everybody knows about this one. Part of this is “Sunshine Tax.” People are willing to pay more to live in places with nicer weather and more to do. Part of it is that, on average, jobs in California typically pay more. For instance, the average teacher in California makes $85K, $36K (61%) more than in my home state of Utah. Nurses make 72% more in California, $100K versus $58K in Utah.
How about for doctors? Well, the salary info isn't quite clear. For example, one source suggests California docs from family practitioners to orthopedic surgeons are paid 15-18% more than Utah docs. Other sources suggest just the opposite, ranking Utah 24th and California 32nd in average physician salary. But either way, it is clear that the difference between a doc in California and a doc elsewhere is nowhere near the difference in other professions like teaching, nursing, and particularly technology workers!
So what costs more in California? Well, housing is the big one. The average home costs $546K in California. Utah is no low-cost housing mecca, but the average is $325K. It's $287K in Nevada and $139K in Indiana. $546K might not seem too bad, until you realize that is only 1/3 of the average in the Bay Area–$1.6M. In case it isn't abundantly clear, the average California orthopedist has to stretch to buy the AVERAGE house in the Bay Area and that house is completely unaffordable for the average California family practitioner.
Don't underestimate the effects of these higher costs on your ability to build wealth.
# 2 High State Taxes
Sure, you might get paid a little more in California, but that's only when you look at your gross income. You won't notice nearly as big of a difference in your net income. There are two reasons for that. The first is that our country has a progressive income tax. You would think that paying a higher cost of living would be canceled out by making more money, but the truth is that the income tax brackets don't cut you any slack for that. The tax brackets are only based on your income, not your expenses.
But wait, there's more. California is also notorious for its state income tax. Check out these brackets from 2018:
That's right. It tops out at 13.3%. There are federal brackets lower than that. Most docs won't be paying 13.3%, they just don't make enough. But they'll all be in at least the 9.3% bracket, and many will hit double digits. By the time you apply both your higher federal tax brackets and the California tax brackets, there won't be any of your increased salary left to use for the high cost of living. The only nice thing I can say about California taxes is that at least they don't have a city income tax like New York City.
I'm not looking forward to doing my first California tax return in 2019. Not only will I be paying 13.3% on every dime I make from Passive Income MD, but I'm told by some Californians that their state income tax return is longer than their federal one! This WCI Network thing would be a lot better if I could talk PoF into moving to Texas, PIMD into moving to Nevada, and TPP into moving to Florida!
# 3 Lots of Wealthy People
A third issue with physicians trying to build wealth in California is that California is seemingly filled with tons of wealthy people. It turns out that 75% of Californians are in the top quintile of income nationwide. In most places in this country, physicians buy houses in the nice neighborhoods and send their kids to the best schools. In California, those docs are competing with dot-com millionaires for those houses. In addition, thanks to the run-up in housing prices, many relatively middle-class Californias are millionaires and multi-millionaires just by virtue of having arrived there before you. Now, those folks can never move to another house in California thanks to the 1978 Proposition 13 that locks in your property taxes until you move, but you still have to compete with them to live in a nice area. Instead of being in the top 1-2%, docs find themselves merely in the top 15% or so.
# 4 Low MediCAL Payments
I was actually surprised that some doctors might get paid more in California, because that has not been my experience talking to friends in my specialty. One of my partners moved here from California and nearly doubled his income. Part of the reason for this is that a large percentage of California ED patients are on Medicaid (called MediCAL to be cute). Nationwide, the average is 32%, but in California, it's 43%. To make matters worse, MediCAL also pays worse than Medicaid in many states. Utah isn't exactly known for awesome Medicaid payments, but a level 5 ED visit here pays $133 (compared to $175 for Medicare). In California, it's only $108. So if you're in a practice that sees a lot of MediCAL patients, you probably won't be paid more in California than you might elsewhere.
# 5 High Transportation Costs
If you've ever driven through California, you may have noticed that it was a rather expensive experience. California has very strict environmental laws, which increase the cost of vehicles sold there. To be fair, California is such a huge market that most car makers have just adopted California standards for all of their US-sold cars. California competes for the highest gas tax in the country at 76.7 cents per gallon. To make matters worse, sales tax on it is calculated AFTER the excise tax is applied, so in a way, you're double taxed.
What's worse, however, is that Californians have notoriously long commutes and sit in traffic for lengthy periods of time, so you end up buying more of that overpriced gasoline. Californians commute an average of 28.9 minutes, the fifth longest in the country. To make matters even worse, it's my observation that Californians tend to drive nicer cars than many other places. Maybe that's because they're wealthier on average, or that they wear cars out faster due to all those commuting miles, or perhaps they just look nicer due to less rust from snow and salt. But the urge to keep up with the Joneses in the car department seems quite high as I drive around.
# 6 Health Savings Account Taxes
My favorite investing account is a Health Savings Account (HSA) because this Stealth IRA is triple tax-free. You get a federal income tax deduction when you put money in, it grows in a tax protected manner, and then when you pull the money out, as long as you spend it on health care, you don't pay any taxes either. In most states, you also get triple tax-free treatment with regards to state income taxes, but not California (and New Jersey.) HSA contributions aren't deductible in California. Why not? Just because.
# 7 No 529 Tax Benefit
California actually has a pretty decent 529 plan, with nice low-cost investments and reasonable fees. But unlike dozens of other states, there is no state tax deduction or credit for contributions.
# 8 SALT Deduction Limitation
Most doctors in the country had their taxes lowered by the Tax Cut and Jobs Act that went into effect in 2018. That wasn't the case for many doctors in California. That's because of the limitation on the SALT (State And Local Tax) deduction. It used to be that all of those state income taxes and property taxes you paid in California were deductible on your federal income tax return. Not any more. You only get to deduct $10K total. Now that hurt me in Utah too, but not nearly as much as a doc who was paying 10% in state income tax plus the property taxes on a fancy new doctor sized California house. It would have been even worse if the proposal to limit mortgage interest as an itemized deduction had gone through too.
# 9 LLC/Corporation Annual Fees
Many doctors and other business owners form an LLC or Corporation for various reasons. There is usually a fee that you have to pay to the state each year for this. In Utah, it's $15. In California, it's 53 times as high – $800 per year. Ouch. At least you get to pay it with pre-tax dollars since it's a business expense.
# 10 Weak Asset Protection Laws
Although California's malpractice environment is head and shoulders over places like Dade and Cook Counties (thanks in part to a $250K cap on pain and suffering), the fact that the people you may damage have higher incomes probably makes up for it. In addition, California is notorious for its weak asset protection laws. Although it protects 401(k) assets, California judges are known to routinely pierce IRAs, at least any amount above and beyond what is “reasonably necessary for the support of the debtor and dependents.” I'll bet my opinion of that amount is quite different from that of a California judge. Don't run to whole life insurance instead — only $9,700 in cash value is protected there and annuities get no protection. But at least you've got that big house right? Not so fast. This isn't Florida or Texas. Only $50-150,000 of those millions in home equity you've got are protected from your creditors. California doesn't have an asset protection trust either. One small consolation is the existence of a little known law that allows for a (probably un-qualified) “Private Retirement Plan” which can protect assets in California.
# 11 Highest Priced Disability Insurance
California is also notorious for particularly high disability insurance rates. If you'll be moving to California for or after residency training, you'll almost surely want to get your disability policy in place before you go.
# 12 Crazy Legislature/Laws
The California legislature is not known to be a particularly physician friendly body. As a full-time assembly, most legislators are professional politicians. Now, don't get me wrong, there are crazy anti-doctor laws being debated all the time including this idiotic one in Utah a few years ago. But California seems to go above and beyond. Perhaps the most recent one is illustrative. Although it hasn't passed (yet), this bill would essentially allow the state to fix all of the prices for physician services as a percentage of Medicare payments. Anesthesiologist Linda Herzberg, MD, described it like this:
When you set payments at percentages of Medicare to a state GDP cap, prohibit physicians from participating in the price-setting commission, and use physician licensing fees to pay for the commission to fix their prices, I’m not too interested in continuing a discussion about how this might work, even if the bill is revised. To quote the CMA letter, “Physicians are not a public utility and should not be treated as such.” If enacted, this bill is more likely to dramatically restrict patients access to care, promote early physician retirements and a physician exodus from California, as well as deter the entry of young physicians into practice in California, than anything we have seen to date.
There seems to be no end of crazy ideas coming from this body. How about this one to tax text messages applied retroactively?
Move or Deal With It?
It's obviously not impossible to get ahead as a doc in California. One need look no further than our WCI Network partner Passive Income MD. This anesthesiologist and his physician wife own multiple different businesses and are doing just fine. Okay, maybe that sentence confirms my hypothesis rather than providing evidence against it. Perhaps this post illustrates the reason why PIMD started looking for additional income in the first place!
If you're not in that sort of financial situation, you've got a hard decision to make. You can leave California and acquire wealth relatively easily simply by seeing patients, carving out a big chunk of your income, and investing it wisely. Or you can stay and make do as best you can. You may want to put more time and effort into building a side business than you otherwise would. You'll likely need to work longer to reach financial independence. You may need to take on more leverage risk or market risk to reach your goals. You'll probably find yourself feeling much more middle class than you otherwise would. Hopefully, your partner's increased salary can help make up some of the difference.
Now I'm sure I'm going to get roasted for this post by the 12% of my readership from California, but that's okay. Just don't expect a response before Saturday as I will be out of cell phone coverage all week while exploring Southern Utah. My staff is now all back from their backpacking trip last week, so feel free to ping them if you need anything while I'm gone.
What do you think? In what other ways is it difficult for physicians to build wealth in California? Have you moved from a high cost of living area to a lower cost area? What was it like? Have you decided to stay in California? What sacrifices have you had to make to do that? Comment below!