As Goes California...

By Kevin Meyer

CNN had another story this morning on the problems with California - specifically with companies fleeing the state.

Buffeted by high taxes, strict regulations and uncertain state budgets, a growing number of California companies are seeking friendlier business environments outside of the Golden State.

And governors around the country, smelling blood in the water, have stepped up their courtship of California companies. Officials in states like Florida, Texas, Arizona and Utah are telling California firms how business-friendly they are in comparison.

Companies are "disinvesting" in California at a rate five times greater than just two years ago, said Joseph Vranich, a business relocation expert based in Irvine. This includes leaving altogether, establishing divisions elsewhere or opting not to set up shop in California.

It is a bit crazy out here - and I have first hand experience.  When my company decided to expand and build a new facility we were heavily wooed by the likes of Michigan, Nevada, and places further east.  Some would even build the facility - all we'd have to do is move.

The decision could have been tough, and many companies driven solely by numbers on traditional accounting reports would have jumped at "free."  We didn't - because we know that a large part of the value we deliver to our customers is created in the brains attached to the pairs of hands that are called "cost" on those traditional reports. 

Moving brains - and hence that value creation engine - is far more difficult than moving hands.  Let alone finding new brains and imparting the same level of experience-driven creativity and knowledge.  Yes that's even more difficult than dealing with byzantine overtime rules, nonsensical environmental regulations, ridiculous taxes, mind-numbing permitting requirements, and the like.  We stayed, we're prospering, and we're even competing globally from our "high cost" location.  Several other companies I know of do the same, even in low margin industries like clothing, foodstuffs, and furniture.

But, unfortunately, the majority of companies are driven by superficial and often arbitrary numbers on traditional P&Ls.  Lower taxes?  Lower labor "cost"?  Fewer regulations?  Bingo... no brainer... hitch the cart to the horse and we're movin' baby!

And that's what California is experiencing.  Companies - and their jobs - are leaving in droves.  However there's a larger lesson here.  California, for better or for worse, often leads the nation... and even the world.  As other countries are lowering corporate tax rates, making the US (even after potentially closing loopholes) one of the highest rates in the world, some are actually advocating higher corporate tax rates in the US.  Really?  Then they'll wonder where the jobs are going.  The US continues to be one of the few countries that tries to tax foreign-earned income - coincidentally like California.

Regulation?  I've recently read some folks wonder why China can build a high-speed rail system in a couple years while in the US rail - and virtually any public works or infrastructure for that matter - gets all mucked up.  It's pretty simple actually - the autocrats in China can swiftly override any nonsense about pink speckled shrimp habitats - if it comes up at all.  Build a dam that will displace a million or two people, destroy a pristine environment and perhaps even lead to more earthquakes?  Just do it.  I don't think we want that extreme... but coming up with 148 new conditions that have to be resolved before building a passive solar power plant in the middle of an empty desert isn't exactly optimal either.

So yes, companies can be successful from California - and the US.  But it is still a very competitive - and global - game.  And we're not doing very well.

Comments

[Tony]

Consider that a lot of "brains" are leaving California at an increasingly rapid pace, it may make increasing sense for companies to follow.

I think if a company relocates (or expands elsewhere), it needs to be a long term decision, not based on temporary incentives. Besides, there will be lots of ex-Californians to hire at the new location!

[Kevin]

Tony - you're absolutely right. With talent also fleeing the state we are concerned. Just this morning I heard on CNBC some supposed guru claiming that North Dakota is the best place to put a new business - for low taxes, business friendly... and it has a very low unemployment rate. Wait a minute - doesn't that actually make it more difficult? If I was starting or relocating a new company these days I'd look for business friendly but a high unemployment rate - where I could tap into some great talent, motivated talent, and also make a social difference.

[Injection Molding Machinery]

It's all part of the recovery after the recession. I believe it will ultimately balance our population of certain areas.

[JM]

As a supplier of logistics services, we sometimes chuckle when manufacturing clients build plants in the middle of nowhere, presumbably due to low taxes and cheap land. They never think about the long-term impact on operating costs and service. For example, freight in and out is generally more expensive because they are in such a rural area - carriers don't want to go there. And don't get me started on labor! One client supposedly had to bus in labor from neighboring counties because the plant location was so remote!