The governor of Texas, Rick Perry, has caused a bit of a stir here in the Golden State by airing a radio ad blasting our state’s business climate as unfriendly for entrepreneurs and business owners.
“Building a business is tough, but I hear building a business in California is next to impossible,” Perry states bluntly in the ad.
State politicians and some business leaders were quick to downplay the ad — Gov. Jerry Brown said the ad is “barely a fart” — and defend California’s business climate, as well as point out that Texas isn’t the business utopia Perry claims it to be. For example, many of the jobs being created in Texas are low-wage, low-skilled jobs, and about one-quarter of Texans do not have health insurance – the highest percentage of uninsured in the nation.
But when you get past all the bluster and political posturing and objectively look at the overall climates for business in both states, you have to admit that Perry has a very valid point.
Our state’s fiscal problems are well-known, as are our high tax rates. To try to get the state’s finances under control, voters passed Proposition 30 by a comfortable margin in November. Proposition 30 will increase the state tax rate on households making more than $250,000 – which is far from being “rich” in many high-cost areas of Los Angeles. These households already pay 62 percent of all state income taxes.
In response, some prominent California business owners have voiced their frustration.
“If you have excessive regulations and excessive tax, that’s just not where you want to be,” stated Peter Farrell, the president of a Southern California medical-device maker that employs 600 workers, in an article on FoxNews.com. Farrell is considering moving his company’s offices out of state.
“California is unfriendly,” he said in the article. “It’s become an unfriendly business environment.”
Even mild-mannered professional golfer and life-long Californian Phil Mickelson decided to speak out in January, saying that the state’s tax landscape might force him to make tough decisions, such as moving elsewhere.
George Ashley, a tax accountant in Nevada, said in the FoxNews article that he has received more than 100 inquiries from higher-earning Californians about the possible tax advantages and feasibility of relocating to a state with lower taxes.
“We have had a tenfold increase from various parts of California, particularly Los Angeles and the Bay Area. People are fed up with the situation and they feel like they are being unfairly treated,” he said.
Here in Los Angeles, of course, we have the dreaded L.A. gross receipts tax, which the Los Angeles Area Chamber of Commerce called the “No. 1 tax complaint of L.A. businesses.” The city now has the highest gross receipts tax rate in Los Angeles County and one of the highest in the nation. No wonder voters turned down a proposal to raise the city of L.A. sales tax to 9.5 percent earlier this month; that would have created the highest city sales tax among the 10 largest U.S. cities.
Also consider California’s arcane rules regarding overtime pay: Federal overtime laws simply require employers to pay overtime wages to employees who work more than 40 hours in a week. But here, overtime pay is required if an employee works more than eight hours in a day.
So if an employee has to leave work two hours early to take her child to the doctor and wants to make this up by working 10 hours the next day, doing so would require her company to pay her two hours of overtime pay. Many companies will simply refuse to authorize the overtime, in which case the employee would lose the two hours of valuable pay simply for taking her child to the doctor.
It’s also very difficult for employers to prevail when disputing former employees’ unemployment claims. California’s unemployment system comes down heavily on the side of employees versus their former employers.
Time will tell, of course, the impact of all of this (if any) on business relocations out of California, whether to Texas or any other state. But according to “The Great California Exodus: A Closer Look,” a report recently published by the Manhattan Institute, more people have left California than moved here since 2005. The report attributes this net out-migration to “high taxes, burdensome regulations, lack of public-sector reforms and a lackluster job climate.”
In my opinion, it’s time to stop all the political posturing and warring of words with governors and business leaders in other states and start focusing on what needs to happen in order to make California an attractive state for entrepreneurs and business owners.
The fact is that Perry is essentially right: California is not an employer-friendly state right now. The question we face is simple: What are we going to do to make it one?
Arthur F. Rothberg is the managing director of CFO Edge of Los Angeles, a provider of outsourced CFO services.
For reprint and licensing requests for this article, CLICK HERE.