Earlier this month, Texas governor Rick Perry came to California to talk about doing business in the Lone Star State. A dismissive Jerry Brown wanted to talk about the weather. “A lot of these Texans that come here, they don’t go back,” California’s governor tried to explain to reporters. “I mean, who would want to spend summers there in 110-degree heat inside some kind of fossil fuel air conditioner? Not a smart way to go,” he said. Brown dismissive attitude overlooks the powerful economic appeal of Perry’s home state—but never let the facts get in the way of a good old-fashioned, red-blue political dustup.
Perry, a former Republican presidential aspirant up for reelection next year, spent about $24,000 to air radio spots around the state promoting Texas’s sunny business climate. “Building a business is tough, but I hear building a business in California is next to impossible,” Perry intoned. “Low taxes, sensible regulations, and a fair legal system are just the thing to get your business moving to Texas.” That modest ad buy returned 100 times as much in free publicity, thanks, in large part, to Governor Brown. “You take a little radio ad and all you guys run like lap dogs to report it. [The ad] is not a burp. It’s barely a fart,” Brown said, to the delight of newspaper editorial writers, television news anchors, and ten-year-old boys from San Diego to Humboldt.
A wind is blowing, all right. When the Texas governor flew back to Austin after a four-day visit to the Golden State, he had no list of commitments from companies looking to relocate tucked away in his jacket pocket. He didn’t need one: companies seem to be moving without Perry’s encouragement.
By now, the case against California’s economic climate is well known. At 9.8 percent, the state’s unemployment rate remains the third highest in the United States, a stubborn two percentage points above the national average (Texas’s 6.1 percent unemployment is nearly two percentage points lower). After November’s election, thanks to the passage of Proposition 30, California now boasts the highest personal-income and state sales taxes in the nation. California’s corporate income tax is the highest in the western United States. Even with Proposition 13, California’s property tax is the 15th-highest in the country. Decades of compounding rules and regulations—health and safety, environmental, labor and workplace—have made the Golden State the least hospitable place to do business in America, according to survey after survey. “Some time in the past, California became uncompetitive with other states because of their tax [and] regulatory policies in particular,” Perry told the San Jose Mercury News editorial board last week. “Twelve years ago, California wasn’t looking over its shoulder,” he said. “They’re not looking over their shoulder now—they’re looking at our backside.”
Nice line. That said, it isn’t quite correct that building a business in California is “next to impossible.” Lots of people do it every year, and many well-established businesses find creative ways to overcome California’s counterproductive tax laws and regulations. For instance, one of Brown’s favorite companies, Apple, avoids California’s high corporate taxes by managing its money through a Reno, Nevada–based subsidiary. But the task of starting and expanding a business is massively and needlessly difficult, which underscores Perry’s larger point. Given the opportunity to grow, California corporations look out of state. Apple announced last year that it would build a $304 million campus in Austin, where it plans to employ 3,500 people. Chevron plans to move 800 jobs from the Bay Area to Texas over the next two years. Comcast shut down all of its call centers in California last year, shifting 1,000 jobs to Oregon, Washington, and Colorado. Campbell Soup shuttered a Sacramento plant, cutting 700 jobs. Meantime, the Austin Chamber of Commerce says interest from California firms in relocating has doubled or tripled since the November election.
Perry’s visit triggered plenty of wind from California boosters, who insist that the Golden State remains dynamic, and that something resembling an economic recovery is taking place. “California is back,” Brown tells anyone who will listen. “California has once again confounded our critics,” the governor said during his state of the state address last month. An increasingly common refrain in California today is that “you get what you pay for.” Taxes are higher—and should be higher still—because it’s an expensive state with a large population and plenty of services. And unlike residents of Dallas or Houston, Californians can surf in the morning and ski in the afternoon. Yet, as former California legislator turned Texas transplant Chuck DeVore points out, “California’s cost of living is 132 percent of the U.S. average, while Texas clocks in at 90 percent.” Beaches and mountains are great, but so is being able to afford a nice house.
It’s too early to say whether California is indeed “back,” or whether the new tax increases—combined with rising health-care costs and new regulatory burdens associated with the state’s 2006 global-warming law—will drive more families and businesses into the welcoming arms of not just Texas, but also the godforsaken deserts of Nevada and Arizona. In January, the state reported $5 billion in “unexpected” revenues, but the windfall was actually predictable: the nonpartisan Legislative Analyst’s Office pointed out last month that many top-earning Californians, who rely more than most people on investment income, decided to take their profits in 2012, before federal income and capital-gains hikes kicked in on January 1. Better to take the hit from the state, where Proposition 30’s tax increases were retroactive to January 2012, than face a double whammy this year.
Unfortunately, the state legislature usually spends one-time, windfall revenues on continuing programs, a habit that helped create the fiscal crisis that has engulfed California for nearly a decade. Whatever good news may be emerging from California, the state’s unfavorable business climate doesn’t bode well for a vibrant, lasting recovery. “If you don’t have the business structure in the state to pay for the services that are desired by the citizens, at some particular point in time you go bankrupt,” Perry warned last week. “And, you know, I will tell you there are some warning signs in California that are very disturbing—on the size of pensions, on the amount of debt that’s being created out there. And California going bankrupt is not good for America.”
At some point, California boosters may realize that a temperate natural climate and a healthy business climate are two different things. But by then, how many more businesses will be gone with the wind?