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It’s no myth: businesses are leaving California at an alarming rate

A local research institute has concluded what a lot of business people have been saying for years: that California is an expensive place to conduct business, and that a lot of businesses have left the state as a result.

Sixty four percent the businesses that have left California in the past three decades have moved to Nevada, Arizona, Texas or Oregon, all states that compete directly with California’s economy, according to the 2022 Kosmont-Rose Institute Cost of Doing Business Survey.

From a business owner’s perspective, all four of those states have two things in common: they’re all more affordable places to live and do business than California, the Kosmont-Rose study found.

While there are many benefits to being a business owner in California, the cost of doing business here can make it difficult to take full advantage of them, said Ken Miller, director of the Rose Institute of State and Local Government at Claremont McKenna College and a co-author of the report.

Rising home values, office rents, labor costs, and too many “burdensome” state and local laws are some of the reasons why it’s more expensive to own and operate a business in California than maybe any state in the country, according to Miller

“A lot of cities outside of California are making a strong case for businesses to leave the state, and a lot of them are succeeding,” Miller said.

Researchers from the Rose Institute, an affiliate of Claremont McKenna College, and Kosmont Cos., an economic consulting firm in El Segundo, surveyed 158 cities – most of them in Southern California – to determine the most expensive places in the state in which to do business.

The annual survey, which focuses mostly on Southern California cities, returns this year after a three-year absence. The 2020 survey [based on data gathered in 2019] was revamped so it would better show where businesses were ending up when they left California. The survey was not published in 2021 and 2022 because of the pandemic.

Besides California, this year’s study includes data from cities in 11 states, all of them west of the Mississippi River. It delivers a blunt assessment of California’s business climate, one that few – if any – business owners in the state would argue with.

“California’s costliness for businesses is difficult to overstate,” the report states. “While many cities will assert competitiveness or business friendliness… the bottom-line cost levels of many California cities stand out as measurably higher than cities in other states.

The study uses a formula based on seven factors to rate whether or not a city is business friendly: sales tax, utility tax, business license fees, office rents, home values, minimum wage [some cities require more than the state’s mandated $15.50 an hour] and crime, which is based on 2019 FBI data.

Each city is given a score ranging from one to five, five being the most expensive score possible. Culver City, for example, is the most expensive California city in which to do business according to the study: it scored five in all seven categories except minimum wage, where it scored four, for a total score of 4.86.

San Francisco, San Jose, Irwindale, Los Angeles, Inglewood, El Segundo, Long Beach, Covina and Torrance complete the top 10. Palm Springs, at 11, was the only Inland Empire city to make the top 20, which included four non-California cities: Seattle, San Francisco, Bellevue, Wash. and Portland, Ore.

Two Inland cities – Adelanto and Yucaipa – made the list of the top 20 California cities deemed to be least expensive places in which to do business, ranking three and four, respectively.

Fifteen of the 20 least expensive cities in the study are outside of California: three each from Nevada, Arizona and Texas, two each from Oregon and New Mexico and one each in Idaho and Minnesota.

Those state are included in the survey because they are frequent destinations of businesses that leave California.

The study’s business migration numbers further drive home the point that businesses are leaving California in large numbers, and that that trend has been happening for a long time.  From 1990 to 2019, 65,273 businesses left California while 45,310 businesses moved into the state, a net loss of 19,963 businesses.

During that 30-year period, the Las Vegas metropolitan area was the most popular destination for businesses leaving California: 2,832 fled California to locate there during that time. New York (1,455), Reno (1,088), Phoenix (883) and Portland (868) complete the top five.

In 2019, nearly twice as many businesses left California as moved into the state, the survey found.

The survey does a good job of of detailing why it’s so difficult to operate a business in California, but none of its findings are likely to surprise anyone who owns a business here, said Larry Kosmont, president and chief executive officer of Kosmont Cos.

“Anyone familiar with California knows there’s too much regulation and that taxes are too high, and that both of those things have been true for at least 30 years,” Kosmont said. “And I expect to see that trend continue.”
ZOOM, and other technologies that grew during COVID-19, have made it easier for people to work out of their home, which will make it easier for businesses to move some of their operations out state, Kosmont believes.

“It’s not like you have move your entire business out of California, not with all of the digital technology we have now,” Kosmont said. “You can just move the expensive parts, and I think that’s what we’re looking at. I think that’s the wave of the future.”

But not every businesses can just pick up and move.

A heavy manufacturing company might find such a move too difficult logistically, and a high-tech company probably wants to be in or near Silicon Valley, because that’s where it will find its best employees, Miller said.

“There are premiums for doing business in California, and some businesses are willing to pay them,” Miller said.

 

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