California and Texas are like the two biggest kids on the block going toe-to-toe for bragging rights. Who’s the biggest? Who’s the best?
Bravado aside, comparing the business climate in these two states reveals why one state is lagging while the other is thriving.
California, once the most attractive business environment in the nation, is today caught in a downward economic spiral while Texas is on the upswing.
Between 1960 and 1990, more than four million people moved to California, attracted by the state’s beauty, weather and booming economy. However, a 2012 study by the Manhattan Institute found that since 1990, California has lost most of that gain as millions moved out of the state.
Many of those who left were business owners driven out by California’s high income taxes, oppressive regulations, high energy costs, property taxes and labor costs. As employers relocated to Texas, Nevada and Arizona, workers followed, taking their money with them — a total of $18.55 billion in lost wages from 2000-2010.
Once a magnet for job creators, California’s unemployment rate has been higher than the national average for the last 22 years.
In 2012, 650 business leaders surveyed by Chief Executive Magazine rated California the worst state in the nation for business — for the eighth consecutive year. That same survey rated Texas No. 1 for the eighth year in a row.
As California lost population, Texas grew at double the national rate. Former California State Assemblyman Chuck Devore says the reasons are clear.
Devore says that in California, state and local taxes consume one-third more of the economy than in Texas. In November, California voters approved Proposition 30, further increasing taxes on incomes over $250,000. The income tax rate for top earners in California is 13.3 percent. In Texas, it’s zero.
Taxes aren’t the only problem. Devore estimates that regulatory costs in California are costing small businesses more than $134,000 per year and growing, as lawmakers pass 900 new laws each year, including the state’s costly cap-and-trade regulations. He says permitting a major project in Texas takes four to five months; permitting that same project in California takes four to five years.
The better business climate in Texas is not lost on California employers.
The Campbell Soup plant in Sacramento is closing in July after 66 years because of high production costs, eliminating 700 jobs. Production will be shifted to plants in North Carolina, Ohio and Texas.
Comcast announced it will close all three of its call centers in Northern California because of the high cost of doing business.
ResMed, a San Diego medical device manufacturer with 600 employees, is considering moving out of state in the wake of the Prop. 30 vote.
The California Manufacturing and Technology Association reports that the Golden State has lost 613,000 manufacturing jobs — one-third of the state’s manufacturing base — over the last 10 years.
So, what does all this mean to us? It provides a blueprint of what to do — and what not to do.
Washington’s latest revenue forecast projects a $900 million deficit in the next two-year budget and a $1.1 billion shortfall for the following biennium. While Gov. Inslee has rejected a general tax increase, some lawmakers will be tempted to increase business taxes and fees. The experience in California shows that is not the answer.
What is the answer? Judging from what’s happening in Texas, the answer is to create a better business climate.
By lowering the cost of doing business in Washington and easing the regulatory burden on employers, state officials can help existing businesses grow and attract new ones. Encouraging growth will help create jobs for the 300,000 unemployed people in our state and produce more tax revenue to support vital state programs.
Don Brunell is president of the Association of Washington Business, Washington state’s chamber of commerce.