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Businesses Are Fleeing California Along With Its Residents, And President Biden Should Pay Attention
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ALAMEDA, CALIFORNIA – MARCH 16: California Governor Gavin Newsom looks on during a press conference … [+]
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Last year, California’s population declined for the first time in recorded history and it lost a seat in Congress. The state begins to develop a two-tier society in which high-income, well-trained technicians cluster in the large coastal cities, while lower-income, less-educated workers are banished inland or displaced entirely. Well, a new study finds that corporate headquarters are also leaving the state at record speed.
For decades, California was the state of opportunity in the land of opportunity. Eastern Mississippi people, attracted by California’s exceptional climate, geographic beauty, and economic opportunities, flocked there: the population grew 10% or more in every decade from 1850 to 2010.
Well, as with its famous raisins, California opportunities seem to be running dry. From 2000 to 2020, California suffered a net loss of 2.6 million people to other US states. The total population was sustained by natural population growth and heavy foreign immigration, but in 2020 foreign immigration declined and the state’s birth rate continued to decline steadily. As a result, California’s total population decreased by 182,000 people.
A new study finds corporate headquarters are leaving California, too, and more and more often. Economist Lee Ohanian of the Hoover Institution at Stanford University and Joseph Vranich, president of Spectrum Location Solutions consulting firm for location selection, gathered data on the relocation of the California headquarters from January 2018 to June 2021. As shown in the table below, they have documents 265 head office relocations over a period of three and a half years or an average of six relocations per month.
California headquarters losses from 2018 to 2021.
Ohanian, Lee and Joseph Vranich. Why Headquarters Is Leaving California in Unprecedented Numbers Hoover Institution Economics Working Paper 21117 (2021).
This may not seem like much, but as the authors note, this is an undercount as many relocations go unpublished, especially those by less newsworthy, often smaller, companies.
More worrying for California than the actual number is the trend. There were more moves in the first half of 2021 – 74 – than in all of 2018 or 2020, and the monthly average in 2021 so far – 12 – is twice the overall average of six. However, while the reported shifts slowed during the pandemic, they are accelerating as the economy reopens. It’s unclear if this is the new normal, but it’s not a good sign for California.
Some of the most notable companies to leave California during this period are Apple AAPL (American headquarters moved from Santa Clara to Austin, TX), Nestle USA (Los Angeles to Arlington, VA), and Oracle ORCL (San Mateo to Austin, TX). ). The following table shows the most popular destination states, led by Texas, Tennessee, and Arizona.
Top destination states for former California corporate headquarters.
Ohanian, Lee and Joseph Vranich. Why Headquarters Is Leaving California in Unprecedented Numbers Hoover Institution Economics Working Paper 21117 (2021).
While it isn’t surprising to see Texas at the top, the target states across the country are: the Midwest (Indiana and Minnesota), the South (Florida and Georgia), the Mountain States (Colorado and Idaho), and other western states (Arizona and Oregon).
The authors cite a variety of reasons why companies are relocating their headquarters out of California.
First, California has some of the highest taxes in the country. The Tax Foundation ranks California 49th in its state corporate tax climate ranking. Only New Jersey has a worse tax climate.
The state also has one of the worst legal environments. Laws like the Private Attorney General Act allow employees to bring civil actions against employers on behalf of themselves, other employees, or even the State of California. As explained in the study, these laws don’t do much to protect employees, but they do result in a plethora of costly lawsuits filed by overzealous attorneys.
California is also the most regulated state in the country. According to the Mercatus Center at George Mason University, California has 396,000 regulatory restrictions. New York has the second highest number of restrictions at 296,000. Regulation increases the cost of running a business and all other things being equal, more regulation reduces economic growth.
One way that regulation pervades the California economy is through permits and licenses. As the study reports, California permits and licenses range from “Air Permit,” “Furniture or Bedding Manufacturer License,” “Importer License,” “Industrial Rainwater Permit,” “Medical Device Manufacture License,” “Buildings and Construction.” “. Permit ”,“ Burglar alarm permit ”,“ Permit for the discharge of industrial wastewater ”,“ Public operating permit / permit ”,“ Permit for underground storage tanks ”, among others.
Allowing for frustration can be the straw that breaks the camel’s back. The study provides an example:
“In San Clemente, Orange County, a company applied for a permit to build a walkway between two buildings to prevent forklift drivers from driving down an alley. The separate owners of the two rented buildings agreed to the walkway – which the tenant would pay for – and were not referred to the company for complaints. Approval for a simple operational and security improvement has been denied. “Why should we stay here?” a company vice president asked, saying, “There was one more thing that pissed us off about California.” Eventually, the company moved its entire facility, headquarters and warehouse to Florida and no longer has a presence in California. “
California also has some of the highest prices in the country. The US Energy Information Administration ranks California 48th in energy costs for commercial operation per kilowatt hour (kWh). Only Alaska and Hawaii are more expensive. At $ 9.35 per kWh, Florida costs only about half of California’s $ 17.20. High energy prices increase operating costs, so it is not surprising that companies prefer cheaper states.
In general, prices in California are 16% above the US average according to the BEA regional price parities. Again, only Hawaii has higher prices and consumer goods have to cross the Pacific Ocean to get there.
Nowhere are California’s high prices more evident than in housing. The typical home value in California is $ 683,996 compared to, you guessed it, Hawaii is $ 730,511. High real estate prices, in large part caused by restrictive zoning laws, and high prices for other goods and services make it difficult for people on modest incomes to live in California.
Of course, nobody likes high prices, so the high cost of living in California has deterred some higher-income people from living there. For businesses, California’s high cost of living makes it difficult to attract and retain employees.
While this study focuses on California, it has national implications. In the past decade, businesses and people have left California for other states, particularly Texas. In other words, they voted with their feet in public policies that made Texas affordable for residents and a great place to run a business.
If we want America to remain as attractive on the international stage as Texas on the national stage, we should pursue policies that make us more like Texas and less like California. Unfortunately, the Biden administration and Congress are trying to turn the land of California, complete with higher taxes, more regulation, and higher prices on green power and inflation.
America has had the strongest and most dynamic economy in the world for the past 80 years, but economic success is not guaranteed. Wrong public policies slow innovation, discourage new business startups, and drive off talented workers. Look at California.
In an earlier version of this article, Mr. Vranich’s company was incorrectly referred to as Spectrum Location Decisions. The correct name is Spectrum Location Solutions.
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