A new analysis recently released by the Hoover Institution of Stanford University found that the number of businesses leaving California in 2021 has significantly picked up compared to the previous three years.
According to the analysis, California has seen 265 companies leave California for other states since 2018, with 114 alone moving to Texas. While 2018 – 2020 remained somewhat steady, with 58 leaving in 2018, 78 leaving in 2019, and 62 leaving in 2020, 2021 has already seen figures double. In the first half on 2021, 74 companies have already left the state.
While there have been some bigger name companies leaving, such as HP Enterprise and Oracle, most leaving are usually smaller companies or simply a headquarters relocation that still keeps the bulk of jobs in California. However, the Institution notes that the loss of small companies with the potential to quickly grow also leads to stagnation in businesses and innovation
“Losing small but rapidly growing businesses is a death knell to an economy, because long-run economic growth requires new, transformative ideas that ultimately displace old ideas,” the analysis found. “And the transformative ideas almost invariably are born in young companies.”
The Hoover Institution also noted well over a dozen reasons for the exodus of businesses including the bad business climate of the state, high business taxes, a difficult legal climate unfavorable to businesses, difficulty in obtaining business permits, high labor costs, overtime laws that start time and a half pay for both working more than 8 hours in a day and 40 hours in a week rather than just 40 hours in a week, high energy costs, a lack of affordable housing, high cost of living, not enough tax credits encouraging businesses to stay, and no overall reduction of business taxes in California.
“One reason why California’s quality-of-life continues to deteriorate is unaffordable housing,” the analysis said. “The Demographia International Housing Affordability Survey of 2021 examines the “Median Multiple,” which is the median house price divided by the median household income of the same area. The process brings about a reliable indicator for measuring residential markets. Of the 56 metropolitan areas studied in the United States, the 12 most Severely Unaffordable areas include 7 in California with Sacramento being the “least of the worst,” followed by Fresno, Riverside, San Bernardino, San Diego, and Los Angeles. Tied for last place are ultra-costly San Jose and San Francisco.”
However, the analysis did point out a few bright spots where California was luring in or keeping companies, such as tax credit programs. While the Institution did note that the high number of tax credits was keeping many businesses in, in particular sectors such as green energy companies and the entertainment industry, it also noted that without these credits the number of companies moving out would have been far greater.
“California politicians sometimes suggest that other states are being “unfair” by offering economic incentives to lure companies to their states. However, California, too, offers a multitude of grants and tax-abatement incentives designed to keep companies within the state or to attract out-of-state companies. Since Gavin Newsom took office in 2019, the Governor’s Office of Business and Economic Development (GO-Biz) has awarded 147 businesses a total of $593,844,974 in tax credits. Gov. Jerry Brown’s administration was similarly generous. Moreover, California in 2021 has increased funding for incentives including creating a new grant program authorized to last until January 1, 2030. Without such incentives, the occurrences of California headquarters departures would likely be higher than what the record shows thus far.”
But, for the most part, the analysis said that California was “too expensive, too regulated and too heavily taxed, both for companies and for the workers they hire.”
California losing more larger businesses to Texas, Arizona, other large states
Many experts have pointed out that the businesses leaving for Texas and other states are simply a shift in business ideals, with California still attracting many companies fueled by skilled immigrants and focused more on education and innovation. Others note that companies are also moving into California and that California still leads other states on the number of new businesses created a year by a large margin, with California starting up roughly 92,000 businesses a year. The next closest state, Florida, only had 60,000.
Other business experts warn that this is only due to to the higher population, one that is declining at that, and that larger companies with hundreds or thousands of employees are the ones moving out, with new businesses or the far fewer businesses moving into California generally employing far less people.
“There are companies moving back to California,” said economic statistician Henri Fielding, who tracks business relocations across the United States, to the Globe on Monday. “But far more are moving out. There are more companies starting up in California than other states. But that isn’t exactly encouraging growth with so many moving out. And it’s not something to panic about, but California shouldn’t ignore it either.”
“The state needs to realize that their policies are really hurting a lot of businesses who would very much like to stay in California. It’s a good climate, you have a huge pool of workers and resources to work with, and for companies who work with Asia a lot, the Pacific Time Zone is much more favorable than, say, New York or Texas several time zones away.”
“But look at the costs. High taxes are one thing, but when they are squeezed on high land cost, high rent cost, higher wages, more worker protections that start to hinder businesses, and more, well, it’s hard to keep them. The shift to working remote has really helped quicken this. The Hoover Institution study pretty much proves that.”
“This should serve as a wake up call to California. Tax credits, you know, those are a good start in getting back businesses. It’s making LA the center of the entertainment world again for one and is encouraging tech once again. But that’s one positive in a lake of negatives. Whenever a company is threatening to leave, the state needs to ask what they can do to have them stay. Companies that left, they need to ask what they can do to bring them back.”
“And answers like ‘Too late. Goodbye!’ are not helpful or constructive. This is something that warrants serious discussion. The state just can’t wait out other states in raising taxes. Texas will probably do that in the coming years, as will states like Nevada when the population becomes too large to justify such low taxes, but that is a huge gamble. California needs to do something now.”