The Golden State continues to incubate cutting-edge companies in Silicon Valley, but then the successful firms expand elsewhere to avoid the states tax and other burdens.
California has long been among Americas most extensive taxers and regulators of business. But it had assets that seemed to offset its economic disincentives: a sunny climate, a world-class public university system that produced a talented local work force, sturdy infrastructure that often made doing business easier, and a record of spawning innovative companies.
No more. In surveys, executives regularly call California one of the countrys most toxic business environments, while the state has become an easy target for economic development officials from other states looking to lure firms away.
In a 2004 survey of California executives by the consulting firm Bain & Company, half said they planned to halt job growth within the state. By 2011, according to a poll by a California coalition of businesses and industries, 84% of executives and owners said that if they werent already in the state, they wouldnt consider starting up there, while 64% said the main reason they stayed was the difficulty of relocating their particular kind of business. For several years in a row, California has ranked dead last in Chief Executive magazines poll about states business environments.
Labor groups, environmentalists and some politicians jeer at these surveys. But the hard numbers tell a disturbing story.
From 1994 through 2008, the latest year for which data are available in the National Establishment Time Series database (a joint project of Walls & Associates and Dun and Bradstreet), California ranked 47th among the states in net jobs created through business relocation, losing 124,000 more jobs to other places than it gained from other places. Meanwhile, it generated just 285,000 more jobs from new businesses than it lost to business failures, placing 29th in the country—while first-place Florida gained 2.4 million net jobs. Demographer Wendell Cox has noted that close to none of those 285,000 net jobs were created between 2000 and 2008, meaning that start-ups havent contributed to California employment for more than a decade.
The state continues to incubate cutting-edge companies in places like Silicon Valley, where investment remains vigorous, thanks in part to the areas muscular venture-capital industry. Yet its successful firms increasingly expand elsewhere.
In 2007, Google built a new generation of server farms in Oregon; the following year, Intel opened a $3 billion production facility near Phoenix. Earlier this year, eBay, based in San Jose, Calif., said it would add some 1,000 back-office jobs in Austin, Texas, over the next decade. Hank Nothhaft, former CEO of the San Jose-based micro-electronics firm Tessera, has estimated that Silicon Valley lost one-quarter of its computer, microchip and communications-equipment manufacturing jobs from 2001 to 2008.
A suffocating regulatory climate has a lot to do with the states bad business numbers. Writing in the California Political Review this summer, Andrew Puzder, chief executive of California-based CKE Restaurants—which operates 3,000 eateries nationwide—called his companys home state “the most business-unfriendly state we operate in.”
CKE, which runs Hardees and Carls Jr., has stopped opening restaurants in California, where the regulatory process can take up to two years. But it plans to open 300 in Texas, where the start-up time can be six weeks and opening costs $200,000 less than in California.
A 2009 study by two California State University finance professors estimated that regulation cost the states businesses $493 billion annually, or nearly $135,000 per company. Sanjay Varshney and Dennis Tootelian estimated that the burden pushed Californias overall employment down by 3.8 million jobs.
Ironically, green-promoting California is now even losing green manufacturing jobs.
Earlier this year Bing Energy, a fuel-cell maker, announced that it would relocate from Chico in San Bernardino County to Tallahassee, Fla., where it expected to hire nearly 250 workers. Solar Millennium, an energy company, canceled plans to build a facility in Ridgecrest, Calif.—an undertaking that would have created 700 temporary jobs and 75 permanent ones—after lengthy delays caused by state environmental reviews, including one on the projects impact on the Mojave ground squirrel. AQT Solar, an energy-cell maker based in Sunnyvale, will employ 1,000 people at a new 184,000-square-foot manufacturing plant—in South Carolina. Then theres Biocentric Energy Holdings, a Santa Ana energy company that moved to Salt Lake City; and Calisolar, a Santa Clara–based green-energy company building a factory in Ontario, Canada, that will employ 350 workers.
Again, no wonder: California taxes are high and hit employers and employees hard. While the highest individual income-tax bracket, 10.3%, applies to million-dollar earners, the second-highest, 9.3%, kicks in at $47,000. Even in high-tax New Jersey, the top bracket of 8.97% doesnt kick in until filers hit $500,000 in income. California also has a high corporate tax rate of 8.84%.
The states legal environment is a mess, too. A so-called consumer rights law allows trial lawyers to sue firms for minor violations of Californias complex labor and environmental regulations. After lawyers kept sending out threatening letters in mass mailings to thousands of small businesses, demanding payments in return for not suing over purported minor paperwork violations, outraged voters passed the Prop. 64 reform initiative in 2004. Yet that only forced suing attorneys to first show that they were representing plaintiffs who claimed to have been harmed.
California also allows plaintiffs to sue for damages over even minor violations of the Americans With Disabilities Acts architectural guidelines for accommodating the disabled. One plaintiff alone has sued 1,000 businesses, mostly restaurants, and won an average settlement of $4,000. Using an obscure provision of California labor law that requires stores to have enough seats for all employees, trial attorneys have filed about 100 lawsuits, claiming damages of up to $100 per employee, against chain retailers.
Today, California seems to be following the path first trod by New York state, which dominated the nations economy through the early part of the 20th century, only to see massive outmigration of jobs and people, and subpar employment growth as its taxes and regulations rose.
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