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Three Ways to Keep Businesses and People in California


Published May 23, 2022

California’s strict regulatory environment, punitive legal climate, and high tax rates are causing businesses and residents to leave the state at an unprecedented rate. This exodus is negatively affecting California residents and communities. Until the state changes its tune, it will continue to lose jobs, tax revenue, and people.

Discussion Questions:

  1. How are local communities affected when businesses leave a state?
  2. What kinds of policies make it easier to conduct business in a state?

Additional Resources:

  • Read “Why Company Headquarters Are Leaving California in Unprecedented Numbers,” by Lee Ohanian and Joseph Vranich. Available here.
  • Read “Texas or Bust,” by Lee Ohanian. Available here.
  • Read “Does California Need 770 New Laws? No. Will Any Move the Needle on What Needs Fixing? No.” by Lee Ohanian. Available here.
View Transcript

California may call itself the “golden state,” but it is losing businesses at an unprecedented rate.

The state has advantages that most other states don’t. It is one of the largest and most populous states, with large customer bases and key ports that make it a hub for international shipments.

And yet California lost 272 headquarters between January 2018 and June 2021. Even worse, the departures are accelerating. For the first half of 2021, the number of companies relocating their headquarters was running at twice the rate of 2020.

These losses have a major impact on California’s communities. As companies depart they take with them centers of innovations, well-paying jobs, and high earning employees who patronize local businesses, pay income taxes, and support local schools.

This exodus has prompted misguided reactions from the state’s elected officials. Rather than fix what is broken, Governor Newsom’s strategy has been to increase incentives offered to companies. But while Newsom has spent nearly $600 million taxpayer dollars to subsidize businesses, states like Arkansas, Iowa, and Mississippi have been fixing the underlying problem by making easier to run companies within their borders.

So what is the Golden State doing wrong and how can state policymakers reverse the trend? My research points to three ways California can change policy and attract more business.

First, California must make significant changes to its regulatory environment. The state has nearly 400,000 pages of regulations enforced by over 500 state agencies, boards, and commissions, making it the most regulated state in America. Businesses face immense costs while interpreting and implementing them. And despite their efforts, something as inconsequential as a paystub that fails to include an employer’s complete address could result in hefty fines or even lawsuits.

But can’t businesses just work hard to incorporate regulatory requirements into their long-term business plans? Frankly, no. Even if they get everything right now, it is nearly impossible to anticipate what regulations will be added next. Until California changes its tune, businesses will continue to leave the state in search of more business-friendly locations.

Second, California must change its punitive legal climate. The American Tort Reform Foundation has called California a “legal hellhole” because of widespread lawsuit abuse against businesses.

Laws unique to California, such as the California Consumer Protection Act or the Private Attorney General Act which is known as the “sue your boss” law, lead to more lawsuits than are necessary to keep workplaces safe.

In some cases, a company’s legal costs greatly exceed what is typical for the number of workers they employ in the state. Businesses will continue to avoid California so long as the legal climate remains this way.

Finally, California should also follow the example of states like Arizona, Idaho, and New Hampshire and reconsider its tax rates. Of the nearly 1 million residents who have opted to leave California over the last decade, many cited high taxes as a reason for their departure.

Unfortunately, it seems unlikely that California will ever consider lowering individual income taxes. When California had a budget surplus in 2021, Governor Newsom opted to send one-time stimulus checks to middle-class and low-income Californians instead of lowering permanent tax burdens by equivalent amounts.

It’s no wonder that, according to the Tax Foundation’s 2021 State Business Tax Climate Index, California’s tax climate ranks 49th in the United States.

Businesses will continue to relocate their headquarters to lower tax states that are easier to do business in as long as California remains on its current path. It doesn’t have to be this way. But until California changes its tune, it will continue to lose jobs, tax revenue, and people.