By Joseph Vranich
Thirty years ago California was a friendly place to businesses of all types. Today – according to many credible sources – it’s the worst state. To cite just one study, The Hoover Institution found that businesses are leaving the state twice as fast as years prior. Businesses forced to flee are taking revenue, jobs, and opportunities with them. Consider these findings:
#1 – Excessively Adversarial: Chief Executive magazine in its Ranking 2023 Best and Worst States for Business reported that companies continue to flee California because the state’s “anti-business policies have been chasing enterprises elsewhere for many years.” In the past the editors said the state appears to have slipped deeper into the “ninth circle of business hell,” a reference to Dante’s Inferno. “The economy, which used to outperform the rest of the country, now substantially underperforms.”
#2 – Severe Tax Treatment: The Tax Foundation’s 2024 State Business Tax Climate Index declared ranked California at 48 – a position it’s held since 2014 – with only New York and New Jersey being worse. Businesses endure an onslaught of a corporate income tax, excise taxes, ad valorem taxes, sales taxes, property taxes, taxes on utilities, and a costly sales tax on manufacturing equipment. In addition to the excessive rates that companies pay, California has a top marginal income tax rate for individuals at 14.4 percent, the highest nationwide.
#3 – Future Tax Increases: In fiscal 2024, Gov. Gavin Newsom and big-spending legislators are responsible for a stunning deficit projection of $73 billion, according to a report from the Legislative Analyst’s Office. This is likely to result in higher business taxes. Gov. Newsom ordered California’s businesses to shut down during Covid creating widespread unemployment. In a chaotic scramble to get out unemployment benefits, the state sent out $33 billion in unemployment fraud, another taxpayer burden. But the reckless spending continues. CalMatters reports that the high-speed rail program is now projected to cost $128 billion – far higher than the $35 billion voters were told when they voted for the bond issue.
#4 – Worst Regulatory Burden: The California Business Roundtable back in 2002 said the state’s “regulatory environment is the most costly, complex and uncertain in the nation. No other state comes close to California on these dimensions.” Then, Bain & Co.’s “regulatory hassle index” found “California is far worse than any other state by a very significant margin.” Despite these warnings, the passage of draconian measures has intensified every year since with new union-backed and harsh labor laws. An example: a 2024 law “prohibits employers from firing workers for failing drug tests, putting employers in a damned-if-you-do-damned-if-you-don’t situation as drug use by an employee could be cited in lawsuits to establish negligence in any cases of accidents or injuries. In California, drug addicts have more rights now than job creators.”
#5 – Unprecedented Energy Costs: In the past California canceled plans to build six nuclear power plants, launched an effort to close gas-fired electrical plants (temporarily delayed) and is now spending $450 million to ease fish migrations by demolishing four hydroelectric dams (the cleanest way to produce energy) that generate 163 megawatts. These decisions ignore the state’s occasional blackouts and high electrical rates. California’s residential electricity prices have risen more than any other state. In March 2024, California ranks 49th in average electricity rates in the U.S. based on the average for all sectors from the Energy Information Administration. The average California commercial electricity rate is 22.69 ¢/kWh (83% higher than the national average) while the average residential rate is 29.11 ¢/kWh (85% higher than the national average). New “green energy” mandates will further boost rates for companies in every industry.
#6 – Alarming Legal Treatment: California’s unique law, the Private Attorney General Act (PAGA) – often referred to as the “Sue Your Boss” law – allows employees to file lawsuits to recover civil penalties on behalf of themselves, other workers, and even the State for alleged violations. Employers are harmed as employees may litigate virtually any infraction of California’s 1,050-page labor law digest. The costs to businesses are enormous as class action filings reached a new high-water mark in 2023. More than 5,000 employment class action filings marked a 20 percent increase from 2022 and more than doubling of the number in 2017.
#7 – Most Expensive Cost of Living for Employees: A reliable way of identifying the relative cost of living between locations is to compare their Regional Price Parities (RPP) issued by the U.S. Bureau of Economic Analysis. In 2022, California had the highest RPP at 112.5 and the highest RPP for housing rents at 160.2. California has the largest concentration of severely unaffordable houses for sale in the United States, with four of the nation’s five in the least affordable category – San Jose, Los Angeles, San Francisco and San Diego. As costs rise, households are migrating to more affordable markets in record numbers as illustrated by the major demographic reversal that threatens the state’s economic future. Between the Census Bureau’s 2020 and 2022 population estimates, a net 871,000 net domestic migrants have moved to other states. Of course, employees in high-cost states expect greater compensation from employers.
#8 – Oppressive Permitting Procedures: Obtaining permits from public agencies is extraordinarily expensive because of confusing, extraneous and harsh requirements. Example: It can take 2 years to obtain permits just to build a restaurant in California while in other states it can be as little as 1-1/2 months. Also, the California Environmental Quality Act (CEQA) passed in 1971 has become increasingly abusive. The California Policy Center reported that CEQA has morphed “into a beast that denies clarity to companies and derails projects. When projects do make it through the gauntlet, the price adds punitive costs in time and money.” CEQA affects any project that has potential environmental impacts: housing, commercial development, factories, power plants and transmission lines, railroads – anything that changes land use. Permitting is also obstructed by the California Global Warming Solutions Act and other laws, executive orders and agency regulations turning a $1.0 billion project into a $1.5 billion project.
#9 – Unfriendly to Small Businesses: The Small Business & Entrepreneurship Council in 2019 ranked California 49th in terms of small business friendliness (only New Jersey was worse). Little has changed as the SBE Council stated in 2022 that “California’s elected officials seem to be doing everything they can to make it very difficult – if not impossible – for entrepreneurs to start businesses and for small businesses to operate and grow in the state…. High taxes, costly regulations and the threat of more mandates and anti-business policies have already driven hundreds of businesses and residents from the state.”
#10 – Deteriorating Quality of Life: Forbes reported in late 2023 that Bureau of Economic Analysis data showed that total personal income in California declined by 0.2% from 2021 to 2022 while in Texas and Florida personal income grew by 5% and 4.7%, respectively. Meanwhile, reported violent crime is at its highest since roughly 2008, and California consistently outpaces national trends as violent crime has increased since 2020 while nationally it has started to decline. However, those numbers are suspect as the Los Angeles and San Francisco Police Departments have stopped sending crime statistics to the FBI because of alleged technical issues that don’t seem to affect other cities. Meanwhile, the state made it easier for thousands of convicts including violent felons to be eligible for early release with little transparency. California is now host to America’s most homeless despite spending more than $20 billion in taxpayer dollars under Newsom’s direction – a crisis that continues to worsen. Finally, the education system is broken despite spending record amounts on school and teachers. Statewide test scores shows that two-thirds of California students failed to meet Math standards, and more than half did not meet the state’s English standards.
Feel free to call me confidentially at 469-907-4544 for a no-obligation exploration of whether a relocation, expansion or consolidation in a new community makes sense for your company. Joe Vranich, The Business Relocation Coach – “Helping Businesses Grow in Great Locations.”