Politics & Policy

Why Businesses Leave California

California governor Jerry Brown (Justin Sullivan/Getty)
The Golden State’s hostile business environment continues to drive thousands of companies away.

For most of the 20th century, California was a place that people and companies moved to in search of opportunity. The Golden State still has its beautiful climate and technically skilled workforce, but today these things are not enough to prevent companies from leaving the state. A new study seeks to quantify the trend of companies fleeing California and determine how, and to what extent, it is caused by California’s hostile business environment.

The study was conducted by Joseph Vranich, the president of Spectrum Locations Solutions, a site-selection consultancy based in Irvine, Calif. Using publicly available records, mostly media and government reports, Vranich searched for what he calls “California divestment events” — business decisions to shun the state. These come in three types: companies that left the state entirely; companies that expanded in other states rather than in California; and a few companies that had planned to grow in the Golden State but changed their minds.

Vranich found records of 1,510 divestment events occurring in California between 2008 and 2014, but that number is an incomplete accounting of the situation. “Experts in site selection generally agree that at least five events fail to become public knowledge for every one that does,” he writes, concluding that the real total is probably more than 9,000 divestment events for this period.

Even that estimate may not tell the full story. Small businesses are less likely to get media coverage when they relocate, but they are the biggest category of divestment events. Moreover, the cost and compliance burdens of California’s taxes and regulations fall disproportionately on smaller companies, which are less able to afford the teams of attorneys and accountants that mega-corporations can employ. As Carly Fiorina has ably pointed out during the GOP debates, big government tends to benefit big business.

The cost and compliance burdens of California’s taxes and regulations fall disproportionately on smaller companies, which are less able to afford teams of attorneys and accountants.

To no one’s surprise, Texas was the main beneficiary of California divestment events during each year of the study. After Texas, the top destinations for escaping California businesses were, in order, Nevada, Arizona, Colorado, Washington, Oregon, North Carolina, Florida, Georgia, and Virginia.

California’s elected officials dismiss stories about businesses leaving the state as anecdotal propaganda, but it’s hard to argue with the 200-plus pages of divestment events that Vranich’s report lists. Vranich has been conducting similar studies and publicly sharing his findings about thousands of ex-California companies since 2010, yet despite all the evidence, Governor Jerry Brown has made several public statements over the past few years denying a “mass exodus” of California businesses.

Brown has a long history of making excuses when businesses reject his state. When Toyota announced it was uprooting three California plants and consolidating its headquarters in Plano, Texas, the Wall Street Journal quoted Brown as saying, “We’ve got a few problems, we have lots of little burdens and regulations and taxes. But smart people figure out how to make it.” The Journal’s retort: “California’s problem is that smart people have figured out they can make it better elsewhere.”

To be fair, Silicon Valley has enjoyed a boom in the last few years. However, as The Economist noted last year, “whereas venture-capitalists and coders may be rushing to California, others cannot wait to leave,” as the state still faces substantial problems of its own making. “Beyond the gilded strip of land between San Francisco and San Jose is another California, an inhospitable place plagued by over-regulation, mindless bureaucracy, high taxes and endless lawsuits,” in addition to the nation’s highest income-tax rate and highest minimum wage.

The Texas Public Policy Foundation’s Chuck DeVore served in the California state assembly from 2004 and 2010, and he has written frequently about the vastly different approaches to tax policy and economic regulation found in California and Texas. He echoes The Economist’s pessimism about California’s ability to sustain the current tech boom, let alone expand on it to benefit the rest of the state.

#share#In recent years, he says, “California’s job market has rebounded on the strength of Pacific Rim markets, Silicon Valley, and the creative industries. But the Golden State’s big-government-knows-best policymakers continue to export jobs from more traditional sectors of the economy. The net result is a widening rift between the elites who live within ten miles of the Pacific and the rest of the state. It’s only a matter of time before California’s high-tax, heavy-regulation policies will cause the state to once again lead the nation in job losses.” And low-tax, business-friendly Texas will be the biggest beneficiary.

According to Vranich, businesses leaving California experience substantial cost savings, ranging from 20 to 35 percent. And burdensome rules add to the financial factors that influence a company’s decision to relocate. As The Economist describes:

Entrepreneurs who survive the ordeal of gathering all the permits needed to start a business — opening a restaurant can take more than two years in California — are then micromanaged by labour laws telling them when to pay overtime, and how much. They suffer electricity prices that are already among America’s highest, and which may rise further to meet the state government’s ambitious carbon-emissions goals.

Then there is the California Environmental Quality Act (CEQA). A well-intentioned law to curb the damaging effects of development has mutated into a monster. Almost anyone can file a CEQA lawsuit against any project they dislike; plaintiffs win half of the cases they enter, and when they lose, they do not need to cover defendants’ legal fees (the reverse does not apply). Builders are compelled to hire expensive unionised labour to ward off union bosses’ threats of spurious CEQA suits. Shops and petrol stations file cases to prevent competitors from opening up.

The full extent of the damage these regulations have done to California’s economy is impossible to calculate, but Vranich highlights several key areas of impact. Besides the job losses, he found evidence of at least $62 billion in capital that was diverted to other locations. Additionally, the loss of so many business owners and their employees has had a negative impact on California charities. Companies that have left California brought with them the people who donated to California philanthropies, organized new charitable organizations, and volunteered their time.

Texas cities were well represented on the list of top destinations for discontented California businesses. Austin was No. 1, and Dallas, Houston, Irving, Plano, and Fort Worth were also listed. Charles Schwab’s move to Austin exemplifies this trend. As the Austin Business Journal reported, the discount brokerage “has been adding almost 1,000 jobs here as it retreats from pricey San Francisco.”

DeVore observes that businesses leave California for Texas for reasons beyond just lower costs, pointing to the Lone Star State’s hospitable regulatory climate. Beyond the direct dollar savings, businesses moving to Texas benefit from “stronger property rights that enable companies to build new headquarters and factories in months as opposed to the years it takes in California.”

Unfortunately for the companies still left in California, their future in the Golden State is far from bright. According to Vranich, state officials are currently considering enacting still more taxes and fees on businesses in 2016 and 2017, which would “trigger the worst demands on private-sector finances ever organized by the state’s politicians.” If that happens, California’s citizens will suffer even more, but they’ll be rolling out the welcome mat in Austin.

— Sarah Rumpf is a journalist and attorney living in Austin, Texas. Follow her on Twitter @rumpfshaker

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