California Continues As One Of Worst States For Business

November 2007

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The Tax Foundation released the 2008 edition of its State Business Tax Climate report. The report is important because modern markets for labor and capital are increasingly mobile as companies and individuals have the ability to move to where they have the greatest competitive advantage.

Contrary to what many believe, the Department of Labor reports that most mass job relocation is actually not to overseas competitors, but is instead within the United States. The movement of higher taxed folks from California was ratified by a studied published by the Los Angeles Times earlier this year. The study showed the number of individual tax returns that left the state, and compared it to the number of tax returns filed for the first time in the state. While the number of tax returns leaving and entering was roughly the same, the income levels of those leaving was about 9% higher than those who moved from elsewhere. The single-year loss of income taxes to California was around $500 million.

This competition between states occurs because taxes affect business decisions, job creation, and competitiveness by diminishing profits. When taxes are larger, that cost is passed on to (i) consumers through higher prices, (ii) workers through lower wages or fewer jobs, or (iii) shareholders thorough lower dividends or share value. Regardless of who faces the consequences of higher taxes, a state with lower costs will be more attractive to investment, and more likely to face economic growth. Each tax law changes this dynamic, affecting that state’s competitive position as a place to invest, work, and live. States with lower taxes can lure businesses and skilled workers to come to them.

California is the country’s most populous state. It has eight of the 50 most populous cities in the country. California has economies of scale that should make government efficiencies easier to accomplish. In spite of this, according to the Tax Foundation, California has one of the worst business-friendly environments in the country. Here is how California rates:

Overall	47 out of 50 states
Corporate taxes	40 “ “ “ “
Individual taxes	50 “ “ “ “
Sales taxes	42 “ “ “ “
Unemployment taxes	15 “ “ “ “
Property taxes	5 “ “ “ “

In the overall rating, only Rhode Island, New York, and New Jersey did worse than California. In the last four years, California’s rating deteriorated, from 39 out of 50 in 2005, to the current rating of 47 out of 50.

California’s poor showing is in contrast to its neighboring states. Here is how California’s neighbor states ranked:

Nevada	3 out of 50 states
Oregon	10 “ “ “ “
Washington	11 “ “ “ “
Utah	17 “ “ “ “
New Mexico	23 “ “ “ “
Arizona	25 “ “ “ “

The Tax Foundation is a 70-plus year old non-partisan tax research group that is best known for its annual Tax Freedom Day calculation - a calculation of when the average American stops working for government each year (through the payment of taxes), and starts to keep their earnings for themselves.

Fulcrum Inquiry performs forensic accounting and economics, and values businesses and business assets.