California — toxic for business

Last year, the medical technology firm Numira Biosciences packed its bags and left Irvine for Salt Lake City. When asked about the firm’s departure, its chief executive praised Utah’s quality of life but also blamed California’s business environment for the move. “The tipping point was when someone from the Orange County tax [assessor] wanted to see our facility to tax every piece of equipment I had,” Michael Beeuwsaert told the Orange County Register.

For years, California could rely on its temperate climate and a talented workforce to attract and keep businesses even as taxes and regulations increased. No more. In surveys, executives regularly express the view that California has one of the country’s most toxic business environments, and they say it is one of the least likely places they would open or expand a company. Many firms headquartered here say they have forsaken expansion in the state. Meanwhile, California suffers from an unemployment rate some 2 percentage points higher than that of the nation as a whole.

The deep discontent of the business community is just one sign of larger problems in the California economy that predate the 2008 national financial crisis. A study by City Journal using the National Establishment Time Series Database, which has tracked national job creation and migration from 1992 through 2008 (the latest data available), suggests that California’s economy started showing signs of sclerosis a decade ago. So even after a national recovery takes place, the Golden State may keep struggling — unless Sacramento moves to improve the business climate.

Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies. Indeed, from 1992 to 2000, California added 777,000 more jobs from start-ups than it lost to closures. But this dynamism vanished in the 2000s. Between 2000 and 2008, California lost 262,000 more jobs from closures than it gained from start-ups.

Between 2000 and 2008, some 80,000 more jobs left California for other states than came here from other states. The leading destination of the job migration was Texas, with Oregon and North Carolina running second and third. California managed to add jobs only through the expansion of existing businesses, and even that was at a considerably lower rate than a decade earlier.

Another dark sign has been that economic growth in California’s major cities stalled after 2000. Los Angeles and the San Francisco Bay Area had been the engines of California’s economic growth for at least a century. But between 2000 and 2008, California’s two big metropolitan areas produced fewer than 70,000 new jobs — a nearly 95% drop from the 1990s and a mere 6% of job creation in the state. This was a collapse of historic proportions.

Equally troubling was that California’s growth in the 2000s, such as it was, took place disproportionately in sectors that rode the housing bubble. In fact, 35% of the net new jobs in the state were created in construction and real estate. All those jobs have vaporized since 2008, according to Bureau of Labor Statistics data.

While there are many reasons for these troubling trends, the state cannot ignore the role its policies have played in the economic decline. For seven consecutive years, executives polled by Chief Executive magazine have ranked California as having the worst business environment in the country. In a 2011 survey of its members by CalRecovery, a California coalition of businesses and industries based in the state, 84% of about 400 executives and owners who responded said that if they weren’t already here, they wouldn’t consider starting up in the state, while 64% said that the main reason they stayed in California was that it was tough to relocate their particular kind of business. In a recent op-ed, Andrew Puzder, chief executive of Carpinteria-based CKE Restaurants, which manages 3,000 eateries around the country, called California “the most business-unfriendly state we operate in.”

Another troubling sign: California is even losing the battle for green manufacturing jobs. Earlier this year, Bing Energy, a fuel-cell maker, announced that it would relocate from Chino in San Bernardino County to Tallahassee, Fla., where it expected to hire nearly 250 workers. “I just can’t imagine any corporation in their right mind would decide to set up in California today,” Dean Minardi, Bing’s chief financial officer, said.

California’s suffocating regulations have a lot to do with this discontent. A 2009 study by two California State University finance professors, Sanjay Varshney and Dennis Tootelian, estimated that regulation cost the state’s businesses $493 billion annually, or nearly $135,000 per company. Additionally, dense and complex land-use regulations have driven up housing construction costs in the state, giving residents a double whammy: a stagnant economy and unaffordable home prices, even since the real estate bubble burst.

Taxes are another burden. According to the Tax Foundation, California imposes the nation’s second-heaviest tax burden on businesses, and finance officers of major companies recently rated the state’s overall tax environment the worst in the country, according to a poll in CFO magazine.

On top of taxes and regulation, the state can also claim what may be America’s most expensive litigation environment for firms. The American Tort Reform Foundation recently named California one of the country’s five worst “judicial hellholes,” in part because state law allows trial lawyers to sue firms for minor violations of California’s complex labor and environmental regulations.

Gov. Jerry Brown has declared that “California always comes back.” But history shows that great states can decline. Some, like New York, which was the nation’s economic engine before California, never regain their luster. The state’s leaders need to acknowledge the message they are hearing from the local business community and consider ways to help the state regain its economic edge.

Wendell Cox is the principal of Demographia, a public policy consulting firm. Steven Malanga is senior editor of City Journal, from whose fall issue this article is adapted.