For Tax Purposes. What Else?

Edited By Rick Weinberg, California Business Journal 

Breathtaking California beach


How important is it for businesses to be in a tax-friendly state?

It’s everything.

Even the breathtaking beaches, the dazzling mountains and national parks, the beautiful hot desert, the Silicon Valley influence — and the most gorgeous weather in the world — isn’t even to keep businesses from fleeing the Golden State of California because of high taxes.

Add Jacobs Engineering Group Inc. to the list.

One of the world’s top engineering and architecture firm, Jacobs has approximately $15 billion in revenues.

This is a huge finance kick in the groin to California.

With marquee design firms like Jacobs competitors HKS Inc., RTKL, Page Southerland Page, Perkins & Will already in downtown Dallas, HKS CEO Dan Noble wasn’t surprised by Jacobs’ California defection.

“The move is being made for business reasons, such as lower taxes and the business friendly environment,” Noble told the Dallas Business Journal. “The rates in downtown are also less than in the suburbs and the quality of life in downtown Dallas has a buzz about it.”

So, California’s so-called “hostile business environment” continues to drive thousands of companies away.

A study conducted by Joseph Vranich, president of Spectrum Locations Solutions, a consultant firm in Irvine, Calif., quantified the trend of companies fleeing California and determined how, and to what extent, it is caused by California’s “hostile” business environment.

Using publicly available records, mostly media and government reports, Vranich searched for what he calls “California divestment events” — business decisions to shun the state.

These come in three types: companies that left the state entirely; companies that expanded in other states rather than in California; and a few companies that had planned to grow in the Golden State but changed their minds.

Calif LA disney at nightVranich found records of 1,510 divestment events occurring in California between 2008 and 2014.

Yet, according to a report in the National Review, that number is an incomplete accounting of the situation.

“Experts in site selection generally agree that at least five events fail to become public knowledge for every one that does,” Vranich  wrote in his study, concluding that the real total is probably more than 9,000 divestment events for this period.

Even that estimate may not tell the full story, according to the National Review.

Small businesses are less likely to get media coverage when they relocate, but they are the biggest category of divestment events.

The cost and compliance burdens of California’s taxes and regulations fall disproportionately on smaller companies, which are less able to afford the teams of attorneys and accountants that mega-corporations can employ.

Calif palmsAs Carly Fiorina ably pointed out during the GOP debates, big government tends to benefit big business.

To no one’s surprise, Texas was the main beneficiary of California divestment events during each year of the study.

Following Texas, the top destinations for “escaping” California businesses were Nevada, Arizona, Colorado, Washington, Oregon, North Carolina, Florida, Georgia, and Virginia.

Calif desert sunset cloudsCalifornia’s elected officials do not appear to care too much about businesses leaving the state. Yet the problem is real.

Vranich has been conducting similar studies and publicly sharing his findings about thousands of ex-California companies since 2010. Yet despite all the evidence, Governor Jerry Brown has made several public statements denying a “mass exodus” of California businesses.

Brown reportedly has a long history of making excuses when businesses reject his state.

When Toyota announced it was uprooting three California plants and consolidating its headquarters in Plano, Texas, the Wall Street Journal quoted Brown as saying, “We’ve got a few problems. We have lots of little burdens and regulations and taxes.

“But smart people figure out how to make it.”

The Journal’s reply: “California’s problem is that smart people have figured out they can make it better elsewhere.”

OK, so Silicon Valley has enjoyed a boom in the last few years. However, as The Economist noted last year, “whereas venture-capitalists and coders may be rushing to California, others cannot wait to leave,” as the state still faces substantial problems of its own making.

Calif snow on mt“Beyond the gilded strip of land between San Francisco and San Jose is another California, an inhospitable place plagued by over-regulation, mindless bureaucracy, high taxes and endless lawsuits,” — in addition to the nation’s highest income-tax rate and highest minimum wage.”

Texas Public Policy Foundation’s Chuck DeVore served in the California state assembly from 2004 and 2010 and he has written about the vastly different approaches to tax policy and economic regulation found in California and Texas.

He echoes The Economist’s pessimism about California’s ability to sustain the current tech boom, let alone expand on it to benefit the rest of the state.

In recent years, he says, “California’s job market has rebounded on the strength of Pacific Rim markets, Silicon Valley, and the creative industries. But the Golden State’s big-government-knows-best policymakers continue to export jobs from more traditional sectors of the economy. The net result is a widening rift between the elites who live within ten miles of the Pacific and the rest of the state. It’s only a matter of time before California’s high-tax, heavy-regulation policies will cause the state to once again lead the nation in job losses.”

And low-tax, business-friendly Texas is be the biggest beneficiary.

According to Vranich, businesses leaving California experience substantial cost savings, ranging from 20 to 35 percent.

And burdensome rules add to the financial factors that influence a company’s decision to relocate.

Calif beachAs The Economist describes: Entrepreneurs who survive the ordeal of gathering all the permits needed to start a business — opening a restaurant can take more than two years in California — are then micromanaged by labor laws telling them when to pay overtime, and how much.

They suffer electricity prices that are already among America’s highest, and which may rise further to meet the state government’s ambitious carbon-emissions goals.

Then there is the California Environmental Quality Act (CEQA).

A well-intentioned law to curb the damaging effects of development has mutated into a monster.

Almost anyone can file a CEQA lawsuit against any project they dislike; plaintiffs win half of the cases they enter, and when they lose, they do not need to cover defendants’ legal fees (the reverse does not apply).

Builders are compelled to hire expensive unionized labor to ward off union bosses’ threats of spurious CEQA suits.

Shops and petrol stations file cases to prevent competitors from opening up.

The full extent of the damage these regulations have done to California’s economy is impossible to calculate, but Vranich highlights several key areas of impact.

Calif mt poppiesBesides the job losses, he found evidence of at least $62 billion in capital that was diverted to other locations.

Additionally, the loss of so many business owners and their employees has had a negative impact on California charities.

Companies that have left California brought with them the people who donated to California philanthropies, organized new charitable organizations, and volunteered their time.

Texas cities were well represented on the list of top destinations for discontented California businesses.

Austin was No. 1, and Dallas, Houston, Irving, Plano, and Fort Worth were also listed.

Charles Schwab’s move to Austin exemplifies this trend.

As the Austin Business Journal reported, the discount brokerage “has been adding almost 1,000 jobs here as it retreats from pricey San Francisco.”

DeVore observes that businesses leave California for Texas for reasons beyond just lower costs, pointing to the Lone Star State’s hospitable regulatory climate.

Calif mt sunrise mistBeyond the direct dollar savings, businesses moving to Texas benefit from “stronger property rights that enable companies to build new headquarters and factories in months as opposed to the years it takes in California.”

Unfortunately for the companies still left in California, their future in the Golden State is far from bright, according to Vranich, who points out that state officials are currently considering enacting still more taxes and fees on businesses in 2016 and 2017, which would “trigger the worst demands on private-sector finances ever organized by the state’s politicians.”