Ten Non-Profit and Public Agencies Explain Why Companies Leave California

By Joseph Vranich

Speculation is running rampant that Elon Musk might move Twitter’s headquarters out of San Francisco after the city began an investigation into reports that some offices were converted into “nap rooms” for overworked employees.

Having lived part-time in San Francisco, I saw homeless people sleeping on the sidewalks — defecating on them, too — but the city closes its eyes to these conditions. Decisions by the local politicians are bizarre and irresponsible, which is also true of state government officials.

A Twitter relocation would follow a well-worn path of company headquarters leaving for greener pastures. Companies that have put San Francisco in their rearview mirrors include legacy corporations like McKesson, Charles Schwab and Bechtel Group along with countless small businesses.

Running a business in California can be exceedingly difficult. During the 2018-2021 period, a total of 353 headquarters left the state. Notably, 153 HQ departures for 2021 were twice the rate for the prior two years and three times the 2018 rate. Such information is contained in the report Why Company Headquarters Are Leaving California in Unprecedented Numbers issued by the Hoover Institution and Spectrum Location Solutions. The count is almost certainly biased downward significantly because relatively small business relocations are difficult to detect.

The county with the highest number of losses is Los Angeles, ranking No.1, with 80 departures, San Francisco is No. 2 with 52 losses, and Orange County, No. 3 with 39 departures. A surprising finding is that Santa Clara and San Mateo counties combined lost 50 headquarters, a sign that emerging high-tech companies are leaving for places like Dallas, Austin, Miami and Nashville, which possess the appropriate technology workforce.

Bloomberg News in California Faces Loss of IPO Crown as Tech Startup Plans Stymied reported that “Only nine California companies went public during the first three quarters of 2022, compared with 81 that launched IPOs during the same period last year. Even more dramatically, California’s share of US IPO proceeds fell to 2% through Sept. 30, compared with 39% for 2021.”

The states winning headquarters moves are Texas at number one — a position it’s held for more than a decade — followed by Tennessee, Nevada, Florida, and Arizona in 5th place. The situation was summarized well by Kerry Jackson of the Center for California Reform at the Pacific Research Institute: “Companies weary of the hard-left grind in California are drawn by the prosperity-focused public policies agendas in these states.”

Indisputable Findings From Ten Credible Organizations

No one has to take my word that California’s politicians have contempt for private enterprise, that business costs in the state have skyrocketed, and companies are fleeing.

First example: Chief Executive Magazine annually polls CEOs from around the nation and its latest report found that Texas, Florida and Tennessee are the three best states for business. California ranks at the very bottom at No. 50, following New York and Illinois. See “California #350 (again)” in Chief Executive Mag’s Best & Worst States for Business 2021.

A similar finding from the Small Business and Entrepreneurship Council’s Small Business Policy Index ranked Texas No. 1 while California ranked No. 49. Only New Jersey was worse. It’s noteworthy that California’s LLC filing fee and annual fee of $800 each are exorbitant – the highest in the nation. After I moved my LLC to Texas, I paid only a $300 filing fee and it’s free every year thereafter.

A report from the Oregon Department of Consumer and Business Services in 2020 Oregon Worker’s Compensation Premium Rate Ranking Summary found that average workers’ compensation costs showed California ranking at No. 47, while North Dakota, Arkansas and Indiana ranked No. 1 through No. 3. Texas is a big draw, ranking it No. 6, which represents a huge saving over California.

The Tax Foundation’s State Business Tax Climate Index for 2023 placed California at No.48, with New York and New Jersey at the bottom. The situation can only worsen, considering that Gov. Gavin Newsom and Democrat legislators will consider more tax hikes. Meanwhile, 11 states reduced income tax rates in 2021 while also enjoying significant general fund tax revenue growth. This is precisely what economist Art Laffer has argued for years: Tax reductions stimulate economic growth.

It is difficult to calculate legal costs related to labor laws and disputes, but for several years the American Tort Reform Foundation said California is among the nation’s worst. Their latest report California Judicial Hellholes 2022/2023 stated that California’s lawsuit climate ranked No. 47 out of 50. With 395,000 pages of regulations, California is the most highly regulated state in the country. State politicians show no sign that even one law or regulation will be eased for businesses.

Headquarters buildings utilize a large amount of energy. According to the U.S. Energy Information Administration, in a report Average Price for Electricity for September 2022 for commercial customers, California ranked No. 49 for electrical rates based on cents per kilowatt hour. Hawaii ranked No. 50.

California politicians rush to attend ribbon cuttings when a company moves into the state. But beyond the headlines is the fact that 15 states have more capital projects in 2020 for all types of companies and facilities. According to research by Site Selection magazine’s 2020 Governors Cups, Texas led the list with 781 projects while California paled in comparison, with 103, giving it a ranking of No. 16. And when examined on a per capita basis, California falls to No. 46 — tied with South Dakota.

It’s important to examine economic freedom, which signals the ability of a business to grow and prosper. The Fraser Institute’s 2020 report, Economic Freedom of North America, helps capture restrictions that harm a company’s competitiveness. California ranked No. 47 — with Alaska, West Virginia and New York following. The top states were New Hampshire at No. 1, followed by Florida, Virginia, Texas, and Tennessee. Some may dispute those findings based on frivolous reasoning that the Institute is based in Canada.

If so, let’s examine Rich States, Poor States, 15th Edition economic outlook ranking for 2022 by the American Legislative Exchange Council. This method of projecting growth rates indicates California’s ranking at No. 48 is above only New Jersey and New York.

The last source is the U.S. Department of Commerce, Bureau of Economic Analysis, whose data for 2020 shows in its Regional Price Parities by State that California ranks No. 48 with only New Jersey, the District of Columbia and Hawaii being worse when it comes to cost-of-living. Cost escalation s mean employees demand higher compensation, which in turn jacks up costs for Workers’ Compensation and Unemployment Insurance. By now, California may rank last because of recent general tax increases, gas taxes reaching the highest in the land, and housing costs remaining unaffordable for a large segment of residents.

California Democrats want the public to ignore findings about the commercial outflow by celebrating that the state has become the world’s fourth-largest economy. While true, that isn’t because California is a hotbed of growth — it’s because the economies of France and Germany are run so poorly that their rankings have dropped.

In editorializing about the Hoover report, the Wall Street Journal in California’s Corporate Exodus concluded, “No wonder Mr. Newsom seems to be setting the ground to run for President in 2024. Like many CEOs, maybe he wants to get out of the state before things get worse.”

A similar motivation may exist for Elon Musk and Twitter.

Joseph Vranich of Spectrum Location Solutions is a site selection consultant providing location advisory services to corporations. Lee Ohanian is a Senior Fellow. Hoover Institution and Distinguished Professor of Economics, UCLA.