California is bad for business? Don鈥檛 tell Californians.
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Ali Martin Staff writer
| Los Angeles
California lost a major multinational business this month when Chevron plans to move its headquarters to Houston. This comes on the heels of another high-profile defection from the Golden State 鈥� Elon Musk saying in July that he鈥檒l move both SpaceX and the social media platform X, also to Texas.
With the 2024 presidential race now headlined by a California Democrat, Kamala Harris, the political question surrounding such moves is in the spotlight. Put simply, are people and jobs being driven out of California by a hostile business climate?
How hostile the state is depends on whom you ask. Critics and defectors decry the Golden State鈥檚 aggressive environmental regulations, high taxes, and socially liberal policies. California鈥檚 cheerleaders note its top rank in a host of economic metrics and quality of life, symbolized by year-round sunshine, sandy beaches, redwood groves, and jagged Sierra peaks.听
Why We Wrote This
As high-profile companies like Chevron and SpaceX leave California, the state鈥檚 deep-blue bent is in the spotlight, along with Californian presidential candidate Kamala Harris. Is the Golden State鈥檚 economy in decline? The answer is nuanced.
Its dazzling Hollywood history and tech titans attest to the promise that maybe you, too, can strike it rich here with the right idea, the right connections, and perfect timing. The state motto is still 鈥淓ureka!鈥澛�
While the Ancient Greek word means 鈥淚鈥檝e found it,鈥� the million-dollar question for many today is more 鈥淐an I keep it?鈥� High costs have become a key factor behind increasing outward migration by people and businesses. Critics say the Golden State economy is no longer golden.听
鈥淚t鈥檚 an economy that simply exists by sheer strength of being the most wonderful place on the planet,鈥� says Lance Christensen, head of policy and government affairs for the conservative California Policy Center.
But the picture here is a nuanced one, and California鈥檚 advocates say the state should hold its head high.
鈥淲hen you鈥檙e backward-looking, you have one point of view,鈥� says Lenny Mendonca, former chief economic and business adviser to California鈥檚 Democratic governor, Gavin Newsom. 鈥淲hen you鈥檙e forward-looking, I don鈥檛 think there鈥檚 a state in the country that would not trade their economy for California鈥檚.鈥�
CEOs see California as worst state for business聽
California is the most populous state in the United States, with 1 in 8 of the nation鈥檚 residents. But after tripling in the last half of the 20th century, the state鈥檚 population growth has slowed steadily over the last few decades, falling behind the national growth rate from 2010 to 2020. For three of the most recent years, residential numbers were in the red until returning to a slight increase in 2023.听
Those shifts are consequential: California lost a congressional seat after the 2020 census. And the from 2020 to 2022 cost the state over $100 billion in lost revenue from personal income tax.听
A of chief executives ranked California the worst state in which to do business, citing burdensome regulations, labor costs, and high taxes. More than their headquarters out of state from 2018 to 2021. Eleven of those were Fortune 1000 companies. And they鈥檙e moving mostly to Texas, Tennessee, and Nevada, where corporate taxes are lower and labor is cheaper.听
Lower costs are the simple draw. Companies aren鈥檛 leaving because of the climate or other amenities, says Kenneth Miller, director of the Rose Institute of State and Local Government at Claremont McKenna College. 鈥淭hey鈥檙e leaving because they think it鈥檚 more affordable and they can make more profit in Texas than in California.鈥�
This may help explain why Texas鈥� growth has outpaced California鈥檚 so far this century. In 2000, the Lone Star State鈥檚 economy was a little over half of California鈥檚; by 2023, it was closing in on two-thirds. In the last year alone, Texas鈥� growth rate was more than twice that of California 鈥� the biggest one-year gap in almost 20 years.
High tech, high costs, and tree nuts
But the number of California tech startups 鈥� in the past five years 鈥� far outweighs the number leaving. And for the first time in a decade, California is the state with the most Fortune 500 companies, .听
鈥淐alifornia spends no time trying to get other companies from other states to move here,鈥� says Mr. Mendonca. 鈥淲e grow our own.鈥�
Innovation is at the heart of California鈥檚 business culture, whether it鈥檚 world-changing technology or fantasy-inspiring entertainment.听
鈥淭hat鈥檚 part of the California myth, or belief system, that we can be creating things that can be world changers, right?鈥� says Professor Miller. 鈥淲e鈥檙e right at the top.鈥�
The global tech center of the state鈥檚 economy, when factoring in financial ripple effects, according to the California Foundation for Commerce and Education.
But in recent years, especially since the pandemic, the luster of an idea-based economy, which designs things but doesn鈥檛 always make them, has dulled. Americans have learned that global supply chains can break down and that it鈥檚 risky to rely on a geopolitical rival like China to make America鈥檚 goods.听
Still, global trade remains a big part of the California economy, from inbound containers of Asian-made goods to outbound exports like tree nuts and fruits from the state鈥檚 nation-leading farm sector.
鈥淎s long as we can continue to hold a place in the global knowledge economy, we will continue to be a very high value added and therefore rich state, with a lot of poor people ... driving around because we have extreme income inequality,鈥� says Martin Kenney, a community development professor at the University of California, Davis and co-director of the UC Berkeley Roundtable on the International Economy.
For richer, for poorer
That inequality is inescapable. of Californians are poor 鈥� living in or near poverty. That鈥檚 a 2.4% uptick from two years earlier. And California has more homeless residents than any other state, up about 20% in five years.
The meaning of 鈥渨ell paid鈥� is different here, as the cost of housing outpaces wages. California homes hit a median sales price of this summer 鈥� a first 鈥� and more than twice the . Other things such as groceries and utilities cost more here, too.
Still, the California dream persists, bringing dynamism to the state鈥檚 economy.
Small businesses 鈥� those with fewer than 500 employees 鈥� the state鈥檚 workers. Between 2021 and 2022, some聽 new small businesses formed in California, but more than two-thirds as many closed in that same year.
Every small business is an opportunity, says Loren Kaye, president of the California Foundation for Commerce and Education.听
鈥淓very one of those that close or move could wind up being the next Tesla, or name your success story, not happening in California. That鈥檚 a big risk,鈥� he says. 鈥淵ou just don鈥檛 want to have systemic disincentives to form small businesses that do provide those employment opportunities.鈥澛�
Among those disincentives are aggressive environmental regulations. California鈥檚 landmark environmental law聽is a 44-year-old novel-length list of codes and procedures aimed at minimizing the environmental impact of any development. The state has lofty environmental mandates: an 85% cut in 1990-level emissions by the year 2045, and all electricity from聽 sources by then, for example.听聽
Chevron鈥檚 exit 鈥渄idn鈥檛 happen in a vacuum鈥� says Mr. Christensen. 鈥淚t happened because Gavin Newsom鈥檚 Legislature made it inhospitable to do business in California, and even the biggest, oldest, and most wealthy business in California decided that they wanted nothing to do with this.鈥澛�
Chevron has long been vocal about the difficulty of doing business in California, where thousands of employees will remain even when the corporate leaders move. But some of the decline in its own business prospects here reflects the transition toward a cleaner economy where other employers can prosper in the future.听
鈥淐alifornia isn鈥檛 for everybody, but it鈥檚 certainly for a lot of different businesses and industries,鈥� says Mr. Kaye. 鈥淵ou pay a price for being here, but you also get something for it.鈥�
Staff writer Laurent Belsie contributed to this report.
Editor's note: Martin Kenney's title has been updated to give his correct area of specialty as a community development professor.
