OC LEADER BOARD

Last month, our research team at Chapman University and University of California, Irvine reported that the growth in innovation jobs is significantly influenced by state and local taxes: the higher the taxes, the lower the growth in innovation jobs.  

That empirical finding triggered some deeper thinking on our team’s part. How do business executives in Orange County and across the state view the business climate?  

How do they rate the state as a place to do business and thrive?

If tax rates are a major driver of innovation investments and labor expansion, what are other factors that contribute to the business climate in California?

To help us better understand this issue, we created a survey for CEOs and fielded it across the state.

In addition to Chapman and UCI, we partnered with researchers at University of California, San Diego and the University of California system in distributing and analyzing the survey results. Orange County was well-represented among the 150 CEOs that responded.

The results are quite clear: About 63% of CEOs surveyed rated the state’s overall business climate as being either highly unfavorable or somewhat unfavorable (Figure 1).

Figure 1 shows California CEOs rate the state’s overall business climate below average: 2.25 on a 5-point scale.

When asked to rate specific elements of the business environment, it confirmed that taxes are viewed very negatively.

However, as shown in Table 1, the most unfavorably rated aspect is the affordability of housing for the employees of their companies.  

Besides taxes and housing costs, three other elements are important to note as negative aspects of the state: The relationship between their business and state government, affordability of physical space for the business and the time it takes to bring a new or redesigned facility or retail location online.

As we talk to executives across the state in conjunction with our study, we find that this issue of excessive time needed to get projects done is tied to the sense that California’s regulatory environment is highly restrictive.  

There are some positives that CEOs cite about California. The market for their products and services, together with the proximity of universities and research hubs are both viewed very positively. And of course, the weather and the state’s physical amenities are viewed as the most positive attributes of the state.

But, taken as a whole, the positives do not appear to outweigh the negatives. The survey asked CEOs if they were seriously considering a move out of state. Some 39% of them said they were, and another 18% said they would relocate if they could.

Among those considering a move, 64% said that they were considering it “much more seriously than the past.”  

The pace of companies relocating their corporate headquarters out of California has accelerated, reaching 12 per month in the first half of 2021, double the rate of six a month from 2018 to 2020, according to a recent study at the Hoover Institution at Stanford University.

California ranked 16th among states in attracting new significant capital projects, with 106 in 2020, according to “Restoring the California Dream,” a research brief by authors Marshall Toplansky and Ken Murphy and our colleague Joel Kotkin.

By contrast, No. 1 Texas had seven times as many, 781 while Ohio attracted four times the number. California was even behind far smaller states like Illinois, Indiana and South Carolina.  

“On a per-capita basis, California ranked 46th out of all the states. The highest per-capita new project rate was recorded by Ohio; its rate was 14 times higher than California’s,” the study said.

The Chief Executive magazine said larger businesses ranked California No. 50 on the Best and Worst States for Business. Texas ranked No. 1 followed by Florida.

This data from our research and a variety of other sources are pointing to an ominous trend.

Clearly, if the state and Orange County want to reverse this trend, in addition to rethinking the tax environment for businesses and individuals, the government needs to focus on regulatory reform and the relationship it has with businesses.

In 2009, the state created “California’s Commission on the 21st Century Economy,” chaired by Gerry Parsky, the founder and chairman of private equity firm Aurora Partners. This commission’s important and timely findings and recommendations on improving the state’s tax code were ignored by the legislature.

We recommend that a new commission be established and charged with the responsibility of recommending broad-based legislation focused on improving the economic environment of the state. Such a bipartisan commission should be created with the proviso that its recommended legislation not be ignored but be voted up or down by state government.

In a recent Wall Street Journal article, Parsky wrote, “The Golden State has been a beacon of opportunity for decades, and I have been proud to live here for 40 years….. (but) there are deeper long-term issues that threaten the state’s finances and its desirability as a place to live and do business.”

Now is the time, more than ever, to confront those long-term issues and work in common purpose in restoring California’s beacon of opportunity.