As Its Businesses Flee, Is There Hope for California?

X
Story Stream
recent articles

For the past six years, the Tax Foundation's "State Business Climate Index" has named California 48th in the nation. CEO Magazine has placed it dead last for the past eight years in its "Best and Worst States for Business" rankings. The causes of California's business climate struggles are well-documented: high, overly complicated, and numerous taxes, expensive property, increasing energy costs, burdensome labor and environmental regulations, and a state legislature indifferent to business concerns, among others.

So, when rankings like CNBC's show California more competitive, it raises questions. Why? And is there hope for California? While most rankings look narrowly at a few specific areas (for instance, the Tax Foundation looks just at state taxes), rankings like CNBC's "America's Top States for Business" examine the business climate more broadly including all the components a business might evaluate before making location decisions.

Released last week, CNBC's 2014 rankings, which encompass ten categories - cost of doing business, economy, infrastructure, workforce, quality of life, technology and innovation, business friendliness, education, cost of living, and access to capital - put California at #32; still in the bottom half, but at least not in the bottom ten where California typically finds itself.

However, the better score isn't necessarily cause for celebration. Examining both California's category ranks and trends since before the Great Recession (in 2007, California ranked 28th overall), shows weaknesses for the Golden State, particularly in areas on which the state has historically relied. 2007 ranks are used as the baseline since the recession has forced companies to be even more discerning when assessing locations in which to do business.

As the home of Silicon Valley, California naturally ranks 1st in technology and innovation, but Texas is nipping at California's tech heals with a second-place rank in this criteria. California's worst category rankings - cost of doing business (48th), business friendliness (48th), and cost of living (47th) - not only fall in line with most other business climate scores, but they also could be considered the most important criteria for many executives and entrepreneurs when deciding where to start, expand, or move their business.

To compensate for high costs and a hostile business attitude, California has relied heavily on its quality of life, infrastructure, education and workforce (besides technology). California's 2014 ranks for these categories are 23rd, 24th, 26th, and 36th, respectively. Only quality of life and infrastructure are in the top half of states and even then, just barely.

Possibly more troubling for Californians, the Golden State has lost considerable ground in competitiveness since the Great Recession. In 2007, California also ranked 48th in the cost of doing business and business friendliness (the state has made some progress with cost of living - 49th in 2007). But California's areas of strength have weakened over time. California's 2007 ranks (in the same order as above) were 9th, 19th (infrastructure was called transportation in 2007), 31st, and 33rd. Only the education category ranking has seen some improvement.

Just like university rankings, be careful how you read these business climate indices; they attempt to consolidate a lot of different (and often conflicting) criteria into a single number. But California's consistency both in ranks and trends across a myriad of independent sources should give Sacramento pause. Democrats in control of Sacramento seem to have forgotten that California prospered through much of its history because of strong economic growth powered by start-ups and businesses relocating to the Golden Coast and instead, they have fostered an anti-business attitude among their ranks.

While these rankings do not provide the answer on how to stop California's hemorrhaging business climate, they do show a problem exists. And solutions don't necessarily require draconian shifts in policy. For instance, eliminating the state's corporate income tax, whose revenues only accounted for 6% of total state revenues in FY 2012-2013, would substantially make California more competitive while not affecting the budget much (and this doesn't factor in the dynamic revenue adjustments from more business activity like increased sales tax or personal income tax revenues).

It can't be stressed enough that the longer Sacramento ignores the obvious problems, the harder implementing any remedies will be. Meanwhile, other states will continue to thank California for the outflow wrought by its inferior business climate.

 

Carson Bruno is the assistant dean for admission and program relations at the Pepperdine School of Public Policy. Follow him on Twitter @CarsonJFBruno.

Comment
Show commentsHide Comments

Related Articles