According To CEOs, California Continues To Punish Itself

May 2011

Chief Executive Magazine released its seventh annual survey of CEOs regarding the best and worst states in which to do business. For the seventh time in seven years, Texas led the states, and California was rated as the worst state.

This year’s survey covered 556 CEOs, who graded the states on a variety of categories grouped under (i) taxation and regulation, (ii) workforce quality and (iii) living environment. Each of these three major categories contained additional variables, as follows:

Taxation and Regulations

• State income tax and corporate tax rates
• Perceived attitude of government to business
• Degree of employment compliance regulations
• Degree of environmental compliance regulations
• Tax incentives for locating in this state

Workforce Quality

• Cooperative employee-management relationship
• Employee work ethic
• General education level of workforce
• Competitiveness of wage rates
• Availability of workforce with specialized experience/education

Living Environment

• Crime rate
• Quality of public education
• Public health and hospitals
• Real estate costs
• Transportation access
• Arts & cultural institutions

There is only one reason that California ranked so poorly. California managed to overshadow its generally good marks in quality of life and workforce quality with its government practices that chased business away. According to the report,

“California, once a business friendly state, continues to conduct a war on its own economy. According to the Pacific Research Institute, it has the fourth largest government of all U.S. states, with spending equal to 18.3 percent of GDP. The comparable figure for Texas is 12.1 percent. Survey respondents uniformly say the state’s regulators are hostile. “No one in his right mind would start a new manufacturing concern here,” said one California CEO.

Although California is not unique in pursuing policies that prompt wealth and job creators to expand elsewhere, (New York being a good example), the Golden State seems uniquely oblivious to the effect its labor and other regulations are having on its innovative and growth-oriented Silicon Valley. Job growth in the Valley has flatlined. Firms keep their HQs there, but pursue growth in friendlier states. Google, Intel, Cisco and other companies locate new plants in states such as Arizona, Utah, Texas, Virginia or North Dakota.

Sacramento seems to take perverse delight in job-killing legislation. …”

In case one wants to ignore the results as inconsequential, realize that this survey mirrors important population trends. In releasing the results, the magazine’s representative said:

“Today's 'soak the rich' mentality hits business leaders especially hard … CEOs and entrepreneurs vote with their feet - and also pack up jobs and investment with them when they leave."

The article further commented on the impact of the results as follows:

“Not surprisingly, states with punitive tax and regulatory regimes are punished with lower rankings, and this can offset even positive scores on quality of living environment. While state incentives are always welcome, what CEOs often seek are areas with consistent policies and regulations that allow them to plan, as well as intangible factors such as a state’s overall attitude toward business and the work ethic of its population.

This is one reason Texas has consistently held the No. 1 position since 2005. It gets strong marks in all areas important for business creation, and has the second-lowest taxes in the nation. The state has created more jobs than any other—about 250,000 last year. Not surprisingly, it also enjoys the highest inward net migration rate of any state. As a result, Texas gained four Congressional seats, Florida picked up two and Arizona, Georgia, Nevada, South Carolina, Utah and Washington each gained one. All have low taxes.”

Here is a summary of statistics for the top and worst states. The information for taxes and debt are relatively predictive in terms of a state’s position.

The bottom line is this: If Californians want more jobs, they need to start with altering their political representatives.

Fulcrum Inquiry performs economic analysis for litigation , forensic accounting, and business valuations.