NCPA - National Center for Policy Analysis

How California Drives Away Jobs and Business

October 24, 2011

California has long been among America's most extensive taxers and regulators of business.  But it had assets that seemed to offset its economic disincentives: a sunny climate, a world-class public university system that produced a talented local workforce, sturdy infrastructure that often made doing business easier and a record of spawning innovative companies.  Yet the net impacts of these benefits no longer seem able to outweigh the costs of doing business within the state, says Steve Malanga, senior editor of the Manhattan Institute's City Journal.

  • A poll conducted by a California-based business coalition states that 84 percent of business executives and owners said that if they weren't already in the state, they wouldn't consider starting up there, while 64 percent said the main reason they stayed was the difficulty of relocating their business.
  • Between 1994 and 2008, California ranked 47th in net jobs created through business relocation, losing 124,000 more jobs to outmigration than it gained from other places.
  • Simultaneously, it generated only 285,000 more jobs through in-state startups than it lost in in-state business failures.

Researchers have traced this distressing problem of the Golden State to several distinct factors.  

  • First, extensive environmental regulations delay business projects and impose substantial financial costs (estimated at a statewide loss of $493 billion annually by professors from California State University).
  • Second, a plaintiff-friendly legal system has caused undue caution amongst businesses and brought about costly litigation that further increases the costs of doing business in the state.
  • Finally, a highly progressive state income tax structure with a 9.3 percent bracket that kicks in at a mere $47,000 causes the state to be unattractive to skilled workers. A high corporate tax rate of 8.84 percent further compounds tax frustration.

Dozens of companies, including those that were founded in California or conduct most of their business within the state's borders, are gradually moving their operations to business-friendly states such as Florida, Texas and South Carolina.  If California wants to reverse this trend, it will need to recognize the causes of the toxic work environment it has created and address them.  Until then, the exodus of corporations out of places like Silicon Valley will almost certainly continue.

Source: Steve Malanga, "How California Drives Away Jobs and Business," Wall Street Journal, October 15, 2011.

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