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CALIFORNIA'S ECONOMIC DECLINE

Leftwing economic policies have given California the second-highest unemployment rate of any state in the nation. The San Francisco and San Jose metro regions, which added more than 1.1 million new jobs from 1992-2000, produced fewer than 70,000 jobs between 2000 and 2008—a dropoff of 95%. California now spends some $493 billion annually to comply with government regulations, an average of nearly $135,000 per company. These costs are siphoned directly out of the private sector and have reduced California's overall workforce by some 3.8 million jobs. In addition, California's passage (in 2006) of the Global Warming Solutions Act, which imposes heavy fees on the use of carbon-based energy, has shrunk the state's economy by approximately 10%, or $181 billion per year, while reducing its workforce by about 1.1 million jobs.



California has become an economic basket case in recent years. The state's unemployment rate is now second-highest in the nation, right after Nevada’s. As of Spring 2012, eight metropolitan areas in the U.S. had jobless rates exceeding 15%; seven of those eight were in California. Among all the large metro areas nationwide, Oakland, where one-third of children live in poverty, ranks dead last economically.

California's descent into fiscal ruin can be traced back to 1974, when Democrat Jerry Brown was elected governor. As City Journal puts it, Brown believed that government's duty “was to restrain growth, not to unleash it.” Thus his administration took measures to limit business development and expand environmental regulations. By 1978, the corporate-relocation firm Fantus Company rated California a lowly 47th (out of the 50 U.S. states) in terms of business-friendliness.

Brown was succeeded by two Republican governors, George Deukmejian (1983-91) and Pete Wilson (1991-99), both of whom took a variety of measures—such as cutting back existing regulations, rejecting new ones, and reducing a number of taxes and costs of doing business—that helped California make a comeback economically. By the late nineties, a Fantus executive noted: “Companies are once again looking at California as a good place to do business.”

But in 1999, Democrat Gray Davis (Jerry Brown's former chief of staff) took over as governor, and the progress of the preceding 15 years was rapidly squandered. During his tenure, Davis signed no fewer than 33 bills that the state’s Chamber of Commerce characterized as “job killers.” One of those bills nearly tripled the payments that companies were required to make into worker's-compensation funds. Davis was removed from office in a 2003 recall election and was replaced by the liberal Republican Arnold Schwarzenegger, whose economic policies were scarcely distinguishable from those of Democrats, and who in turn was succeeded as governor in 2011 by Jerry Brown, who returned after having held the office three decades earlier.

The new millennium was a watershed moment in the timeline of California's economic condition. From 1992-2000, under mostly Republican leadership, the state gained 776,500 more jobs from start-up businesses than it lost due to business closures. But from 2000-2008, it suffered a net loss of 262,200 jobs from start-ups and closures, and a net loss of 79,600 jobs as a result of business relocations across state lines. During those same eight years, California firms with 500 or more employees lost a combined total of 450,000 workers.

The Bay Area, which includes the San Francisco and San Jose metro regions, experienced economic prosperity from 1992-2000, adding more than 1.1 million new jobs during that period; most of these were information-technology jobs that became synonymous with Silicon Valley. But between 2000 and 2008, the same region produced fewer than 70,000 new jobs—a dropoff of 95%.

Some additional key statistics illustrate the economic malaise that has enveloped California in recent years:

  • From 2005-2009, the state lost 33% of its construction jobs, compared with a 24% decline nationwide.
  • From 2002-2012, more than 125,000 industrial jobs evaporated from California as well—most notably in the San Francisco metro area, which lost 40% of its industrial positions during that decade.
  • Of the 10,763 U.S.-based industrial facilities that were either built or expanded from 2007-2010, only 176 were in California. That amounted to 4.8 facilities per 1 million people—the lowest rate of any state in the Union, and a small fraction of the national average, which was more than 40 facilities per 1 million people.
  • Of the $350 billion that was invested in manufacturing facilities nationwide from 2007-2010, only $8.7 billion (2.5%) was spent in California.
  • From 2001-2012, California accounted for a mere 1.9% of the nation's new investment in industrial facilities.

A major cause of these unpleasant economic realities is the fact that California today imposes a heavier corporate tax burden on businesses than any other state except New York and New Jersey. In conjunction with California's state tax, a host of local taxes and fees have catapulted five California cities—San Francisco, Los Angeles, Beverly Hills, Santa Monica, and Culver City—into the list of America's 20 most expensive places to run a business. California's sales tax, for instance, is the highest in the nation, causing many consumers to pursue out-of-state, catalog, or Internet purchases rather than patronize in-state retailers. According to a spokesman for the California Manufacturers and Technology Association, “The tax burden for a company to operate a business in California is 13 to 14 percent higher than the rest of the country.”

California's regulatory environment is likewise highly burdensome to businesses. In a 2009 study, two California State University (CSU) finance professors estimated that the state’s businesses collectively spend some $493 billion annually to comply with government regulations, an average of nearly $135,000 per company. According to the CSU researchers, these costs, which are siphoned directly out of the private sector, have reduced California's overall workforce by some 3.8 million jobs. Similarly, the steps involved in starting a business—e.g., negotiating permits and filing planning documents—are prohibitively expensive in California. Indeed, it can cost $200,000 more to open a restaurant in California than in Texas.

California's labor laws are among the most complex in the United States, and this too puts a great financial burden on businesses. For example:

  • California's consumer-rights laws allow trial attorneys to sue firms for minor violations of the state's labyrinthian labor and environmental regulations. Attorneys have abused this law on a grand scale, engaging in shakedown practices such as mass-mailing, to thousands of small businesses, letters threatening to sue them if they failed to make payments as penance for minor paperwork violations.
  • Many retailers have been sued for violations of an obscure provision in California labor law requiring stores to have, at all times, enough seats readily available for all their employees.
  • California law also allows plaintiffs to sue for damages over minor violations of the Americans with Disabilities Act's architectural guidelines for accommodating the disabled. One plaintiff, for instance, has sued at least 1,000 businesses, mostly restaurants, winning an average settlement of $4,000 per lawsuit.

The American Tort Reform Foundation asserts that because of such practices (as well as the state's long history of “wacky consumer class actions”), California ranks as one of America's five worst “judicial hellholes.” Similarly, the Institute for Legal Reform rates California’s legal climate as the fifth-worst in the United States. And a Chamber of Commerce study, noting the onerous labor-code provisions on everything from discrimination to employee screening, concludes that California's regulatory environment has created “a cottage industry of class actions” that are toxic to business.

California's unusually draconian environmental laws, designed ostensibly to combat global warming, have also harmed the state's business climate immensely. Most notably, the Bay Area has served as the hub of the new green progressive movement. More than 130 environmental activist groups are currently headquartered in San Francisco, Berkeley, Oakland, and other cities in the vicinity. These organizations lobbied aggressively (and successfully) for the passage (in 2006) of the Global Warming Solutions Act, or Assembly Bill 32, which, in order to cut greenhouse-gas emissions by 30% by the year 2020, imposes heavy fees on the use of carbon-based energy and severely restricts business planning and development. According to an analysis by Sacramento State University economists, AB 32 has shrunk the state's economy by approximately 10%, or about $181 billion per year, while reducing its workforce by about 1.1 million jobs.

Another state mandate stipulates that by 2020, no less than 30% of California’s electricity must be generated by costly, often unreliable, “renewable” sources, rather than by oil- or gas-fired power plants. This virtually guarantees that electricity prices will rise by abut 5 to 7 percent annually. Meanwhile, land-use regulations related to climate-change legislation make it much more difficult for businesses to expand.

Environmentalist orthodoxy thoroughly dominates California's political climate. In recent years, applications for drilling permits in the state have quadrupled, largely because of the discovery of some 15 billion barrels of oil in the shale of Monterey, and an estimated 10 billion barrels near Bakersfield. But oil production statewide has nonetheless declined because most of the drilling applications since 2008 have been rejected. John Hofmeister, former president of Shell Oil’s U.S. operations, says: “I asked [Governor] Jerry Brown about why California cannot come to grips with its huge hydrocarbon reserves. After all, this could turn around the state. He answered that this is not logic, it’s California. This is simply not going to happen here.”

In a 2011 poll conducted by a number of California business groups, 82% of business executives and proprieters said they would not even consider starting up a new business in the Golden State. And for several consecutive years, California has ranked dead last in Chief Executive’s poll of 500 top CEOs about states’ business environments. Dean Minardi, CFO of the fuel-cell maker Bing Energy, announced in early 2011 that he was relocating his company from San Bernardino County to Tallahassee, Florida. “I just can’t imagine any corporation in their right mind would decide to set up in California today,” he said. In a similar vein, Los Angeles business consultant Larry Kosmont has said, “It’s too expensive to operate here, and managers feel squeezed. They feel they can’t control the circumstances any more and have to look somewhere else.” And Andrew Puzder, the chief executive of CKE Restaurants, calls California “the most business-unfriendly state we operate in.”

By no means are business owners the only people who are highly taxed in California. As of October 2012, California residents as a whole were paying the sixth-highest state tax rates in the nation. This tax burden, coupled with disintegrating business opportunities, caused many Californians to relocate to other states. Indeed, 2 million people moved out of the state between 2002 and 2012—their most common destination being Texas, a Republican-controlled, low-tax state.

Notwithstanding California's high-tax climate, the state's budget deficit (as of November 2012) remained astronomical—e.g., more than $200 billion in unfunded liabilities for worker retirement benefits; $73 billion in outstanding bonds for capital projects; and a California State Teachers' Retirement System that would need an additional $10 billion annually for the next three decades to amortize its debt.

Then, on Election Day 2012, Californians voted (by a 54%-to-46% margin) in favor of Governor Jerry Brown's "Proposition 30," a ballot initiative that substantially increased the tax rates paid by state residents earning $250,000 or more annually. Even before the passage of Prop 30, California households with annual incomes exceeding $250,000 were paying 62% of all the state's income taxes; households in the top 2% (earning more than $450,000 per year) were paying 46% of the state's income taxes; and households earning more than $1 million per year—just 34,000 of California's 14 million taxpayers—were paying 25% of the state's income taxes.

In response to Prop 30's passage, many of California's high earners promptly moved themselves and their businesses out of the state. As a result, California's total revenues for the month of November 2012 plummeted by $806.8 million, approximately 10.8% below projections.

In January 2013, Fox News quoted a Nevada-based tax accountant named George Ashley as saying that he had already received more than 100 inquiries from higher-earning Californians about the possible tax advantages of relocating to his state, where there is no state income tax. "We have had a ten-fold increase from various parts of California, particularly Los Angeles and the Bay Area where many people are seeking a way to leave the state," said Ashley. "They are fed up with the situation and they feel like they are being unfairly treated."

Fox News also interviewed a number of wealthy Californians who explained why they now were leaving—or, in some cases, had already left—the state:

  • Matt Bradvica, a certified public accountant in the San Diego office of the national tax advising company McGladrey, said: "As soon as Prop 30 happened, I saw just a huge change in the mindset. It was almost as if that pushes it to the limit. There are other states out there that have no income tax at the individual level. And so if you can save 13% in your business by residing in Nevada, for instance, which is a zero tax state, then I need to consider doing that."
  • A wealthy San Diego retiree who sold his two California homes and relocated to Phoenix said: "It never stops. Pay a little more this year. Pay a little more, pay here. Pay another business tax here. There is no end. So we decided to end it, and left." He said the move was saving him $20,000 per month in property and income taxes.
  • Another San Diego resident who had recently placed his home on the market estimated that he and his wife would save $30,000 per month by moving to Arizona. "We feel like the politically convenient target," he said. "Governor Brown used the tyranny of the majority to steal from the minority. It's that simple. The majority isn't going to vote to increase their taxes—stick it to the guy next door. That is the mentality in California and while we love the state and will miss the beaches, we've had it. We're out."
  • A Napa County winemaker said: "Truly frightening. I was a little shocked when we looked at our first paycheck of 2013. I have nothing taken out above the minimum required taxes and found my net pay was 46% of the gross. Any wonder we, as I'm sure many others, are considering fleeing California for an income-tax-free state, in our case Jackson Hole, Wyoming."


This piece was posted in 2013.

RESOURCES

The Great California Exodus: A Closer Look
Tom Gray & Robert Scardamalia
September 2012

Cali to Business: Get Out!
By Steve Malanga
August 2011

The New Class Warfare
By Joel Klotkin
Spring 2012

The Long Stall
By Wendell Cox
Autumn 2011

The Golden State’s War on Itself
By Joel Klotkin
Summer 2010

Decline and Fall
By Charlotte Allen
November 19, 2012

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