Analysis: California’s economy didn’t push out Toyota

Toyota’s plan to close its Torrance, Calif., headquarters and ship 3,000 jobs to a Dallas suburb has triggered a new round of hand-wringing among those who see business-friendly Texas gaining at the expense of regulation-choked California.

In Austin, Texas Gov. Rick Perry took a victory lap, crediting his state’s low taxes and hands-off policies. Lawmakers and business lobbyists from Torrance to Sacramento said the Golden State must unravel red tape and increase incentives if it hopes to compete for jobs. They ridiculed Gov. Jerry Brown for not even knowing about Toyota’s plans to abandon his state.

The trouble is that taxes, regulations and business climate appear to have had nothing to do with Toyota’s move. It came down to a simple matter of geography and a plan for corporate consolidation, Toyota’s North American chief told the Los Angeles Times. And in the big picture, California’s and Texas’ economies are growing at a similar pace, with corporate relocations — in either direction — representing only a tiny slice of job growth in both states.

“It may seem like a juicy story to have this confrontation between California and Texas, but that was not the case,” said Jim Lentz, Toyota’s North American chief executive.

Toyota left California to move its company’s brainpower, now divided among offices in three states, into one headquarters close to the company’s manufacturing base, primarily in the South.

“It doesn’t make sense to have oversight of manufacturing 2,000 miles away from where the cars were made,” Lentz said. “Geography is the reason not to have our headquarters in California.”

The episode highlights the outsized attention paid to the interstate scrum to woo big-name employers — often with public money. Add in Perry’s high-profile company-poaching visits to California, and the move teed up a talking point for those who argue that California must change its ways to fend off the Texas assault.

“It’s a prime example of the state’s unfriendly tax code and business regulations that drive businesses out of the state,” said Allan Mansoor, the top Republican on the state Assembly’s economic development committee. “The whole thing could have been prevented.”

Economic data paint a different picture, according to experts who study job migration and creation. For one thing, poaching of jobs does little to grow the economy of any state.

The Public Policy Institute of California studied this phenomenon over a 15-year period, from 1992 to 2006. It found that less than 2 percent of jobs lost in California were due to companies leaving, and only 1 percent of jobs created were due to companies moving in.

More recent figures were not available, but experts say it’s unlikely that dynamic has changed, particularly given that the number of major corporate relocations and expansions nationwide has fallen sharply in recent years. According to Conway Data, which tracks site-selection activity, the number of big corporate moves last year was half what it was at its peak in the late 1990s.

“Governors should tune out the war between the states. That’s not where job creation happens,” said Greg LeRoy, executive director at Good Jobs First, a think tank that tracks corporate subsidies. “Job creation happens at home.”

In the big picture, Texas and California are seeing strong job growth. Since they bottomed out in the recession, both states have added about 1.2 million jobs. That represents a 12 percent gain for Texas but only 8 percent for California because of its larger job market. Texas also suffered fewer losses in the downturn.

Average wages, adjusted for inflation, have fallen in both states since 2007. But they have fallen 3.8 percent in Texas, compared to 2.1 percent in California, according to Labor Department data.

For companies that do move, corporate strategy often plays a bigger role than a state’s tax or regulatory climate.

When Northrop Grumman moved its headquarters and 300 jobs to Virginia from Century City, Calif., three years ago, the company aimed to get closer to Pentagon power brokers who decided on big contracts for the company, the company’s chief executive, Wesley B. Bush, said at the time.

Los Angeles-based Occidental Petroleum, which announced earlier this year that it would move its headquarter to Houston, wants to be closer to the profitable Texas oil patch.

Toyota’s thinking is similar.

Lentz said the move grew from a conversation a year ago with Toyota global President Akio Toyoda, about how to structure North American business “for the next 50 years.” The current setup, with corporate affiliates spread across the U.S., no longer made sense for a company that builds and sells millions of cars a year here.

Toyota began looking for a place to consolidate, comparing everything from climate and direct flights to Japan to cost of living and schools in 100 metro areas. It then narrowed the list to four finalists: Atlanta; Charlotte, N.C.; Denver; and Plano, an affluent suburb of Dallas. Torrance was never on the list, in part because Lentz wanted to avoid a culture clash between different arms of corporate management.

With the company’s sales and marketing staff based in Torrance, Lentz didn’t want its engineering and production staffs, based in Erlanger, Ky., to think “sales was taking over.”

“We needed a neutral site,” he said.

Toyota did get some benefits in the move. The automaker will be eligible for $40 million from Perry’s Texas Enterprise Fund, plus some local tax breaks in Plano. But Lentz said incentives were a minor factor in the decision.

There’s not a big difference in corporate taxes between the states, said Scott Drenkard, an economist with the Tax Foundation. But Texas’ lack of a personal income tax can be an advantage in luring companies.

Lentz, who lives in Irvine, Calif., acknowledged drawbacks to doing business in Southern California, chief among them the cost of living and length of commute times. But, he notes, that’s because weather and cultural amenities, among other factors, make the region a highly attractive place to live. And Toyota will still keep a strong presence there — a design center, race car division, parts and ports facilities — 2,300 jobs in all.

“We are not pulling out of California,” he said.

Some companies have cited California’s high costs as a reason to move jobs elsewhere. Charles Schwab, for instance, said it will shift 1,000 jobs from San Francisco – it’s considering lower-cost states such as Arizona, Florida and Indiana – because of the high cost of living and doing business. Joe Vranich, an Irvine-based site selection consultant, says much of his work lately comes from companies aiming to leave the Golden State.

“The state really needs to clean itself up,” he said. “This out-of-California moving has become a predominant part of my business. It’s sad.”

But it’s far from clear that those moves have anything to do with incentives or Perry’s aggressive business attraction campaign, said Pia Orrenius, head of regional economics at the Dallas Fed.

“It’s hard to know how much weight to put on the policy aspect of this stuff,” she said.

A bigger culprit, Orrenius and other economists suggest, is housing prices. The typical home listed for sale right now in the Metropolitan Los Angeles area costs $515,000, according to real estate website Zillow. In the Dallas area, it’s $217,500. That means many workers, Vranich said, can live better even if they earn less.

“On cost of living, Plano wipes us out,” he said.

Still, California does get some wins. Boeing Co. announced last month that it will move 1,000 engineering jobs from Seattle to Long Beach, Calif., in part to tap the region’s deep aerospace talent. That will help replace some of the jobs going away with the end of C-17 production. Technology companies continue to grow in the Bay Area and parts of Southern California.

So while the Golden State could certainly find ways to improve its business climate and economic policy, it’s important to keep some perspective, said Chris Thornberg, founding partner at Beacon Economics in Santa Monica, Calif.

The loss of 3,000 jobs will not break a state that’s home to 15 million jobs, and California still has a lot going for it.

“I don’t think this is the preamble to some massive economic meltdown,” he said.

Torrance will no doubt feel the loss of 3,000 good jobs from the Toyota complex. Its mayor, Frank Scotto, has been among those blaming the costs of doing business in California for the company’s move. But Scotto, like Brown, knew nothing of Toyota’s plans until the company announced them.

And when asked about the prospect of finding new employers to fill Toyota’s massive headquarters with new jobs, Scotto didn’t seem worried.

“The campus that they built here is a beautiful campus,” he said, “so it should be rather easy.”