CALIFORNIA’S STATE MOTTO is “Eureka!” (Greek for “I found it!”). This begs the question: What did you find? Any of us who live here will tell you: We found our slice of paradise, a place where we can thrive and prosper. Many of us might argue it’s the best place in the world to live. And yet, the notion persists that California is not a good place to do business. When did this become conventional wisdom in some quarters? Could it be envy (understandable, right?) or is it based on hard facts? Let’s take a closer look.
State’s economy
There’s no disputing California’s elevated economic standing in the country or, for that matter, the world. While it’s obvious to most how vast and diverse the state is, it’s still a revelation to many that California’s economy—with its $3.6 trillion gross state product (GSP) in 2022—isn’t only the largest of any state in the country, it’s also is the largest sub-national economy in the world. That’s to say, if California were its own nation, it would rank as the world’s fifth-la gest economy, larger than that of Great Britain’s.
Nor is there any question about California’s leadership in key economic metrics including technology, finance, agriculture, shipping and trade, media, business services and manufacturing. This leadership adds to the state’s prominent reputation, both domestically and abroad, as sort of an economic unicorn among states.
But even the most robust economies can fall prey to economic trends and government policies that have an impact on their prosperity. While California hasn’t been immune to these circumstances, it certainly has shown its resiliency and unbreaking ability to not only bounce back, but to also flourish and succeed.
California in the crosshairs
Admittedly, there are more regulations on California businesses than in many other states. And to some degree, California’s status as a liberal enclave— politically, culturally and economically—has long made it a target for conservative pundits who’ve taken aim at this regulatory burden. We’ve all heard about businesses leaving the state in record numbers. For instance, a June 2023 report commissioned by the Los Angeles Area Chamber of Commerce stated: “…businesses continue to leave California… for more business-friendly states because of the lack of affordable housing, cost of living, high taxes and stringent regulatory environment.”
But the question of whether state policies affect, negatively or positively, California’s business climate can draw even the most astute policy wonks into a deep rabbit hole.
Consider, for example, the American Legislative Exchange Council (ALEC), deemed one of the preeminent “business-friendly” think tanks in the country. Funded in large part by the libertarian Koch Brothers, ALEC’s “Laffer State Economic Index” is considered a key measure of conservative economic thinking and reporting.
As described by the Los Angeles Times, “The [Laffer] index measures 15 state policy ‘variables,’ such as top marginal income tax rates, property taxes, public employees per capita, state minimum wage, rightto-work law and whether there’s an estate tax.” In keeping with the Laffer Index’s conservative bent, what a state presumably has to do in order to rank high in all these factors is maintain low taxes, keep government small, practice anti-union policies and jettison estate taxes.
Predictably, this index’s ranking of California is rather dismal. Although the state’s Economic Performance Rank comes in at a respectable 19th in the nation, another key measure of the index, the Economic Outlook Rank, places California near the bottom of the country, at 48th.
That assessment begs the question a recent headline in the Los Angeles Times asked, however. “If California is such an ‘anti-business’ state, then why is its economy booming?” According to the Times, although several business-assessment measures (including the Laffer index, with its biases) label California as one of the worst states to do business in, it’s these measurement tools’ criteria that are faulty. In fact, the four states cited as the “friendliest” and “most successful” states in which to do business—Florida, Tennessee, North Carolina and Texas—all fared worse in terms of state economic growth than California. California actually outpaced all these states, often by large margins.
The Times article sums up thusly: “Many of the [critical studies’] particulars don’t have much to do with economic potential in the real world. The rankings favor states with low taxes and little regulation. They give states high marks for low minimum wages and low-staffed, if not understaffed, public services, as well as right-to-work laws, an obstacle to unionization.”
Indeed, when another researcher in the field measured the ALEC rankings for all 50 states against their economic growth, he found that, if anything, a higher index score correlates with a “worse economic performance.”
Why California?
The question remains: Is California a good place to start or run a business? According to Business Finance Capital (BFC), a Los Angeles-based Small Business Administration Certified Development Company, the answer is a resounding yes. In fact, 99.98% of California businesses are categorized as small businesses, and they make up an impressive 48.8% of the state’s workforce. As BFC points out, California ranks No. 1 in terms of innovation and technology, as well as access to business capital. The company cites four specific reasons why California provides such a favorable climate for small business: Large population – California hosts a substantial pool of workers, a diverse customer base, and ready access to a wide professional network of business partners (lawyers, consultants, accountants, etc.). Diverse and productive economy – From 2012 to 2022, for example, the state’s Gross Domestic Product (GDP) grew at an annualized rate of 2.4%. That GDP spells low unemployment and greater disposable income, which leads to more sales and greater profitability. Business resources – California’s abundant business-focused resources and programs are among the nation’s most robust network of organizations dedicated to aiding small-business development. Strong infrastructure – The state’s transportations systems, access to broadband and other digital services, and investment in capital assets that support core state functions (state office buildings, fi e and emergency services and courts) all provide small businesses a valuable framework for running efficient and competitively.
The business of air quality
Beyond these critical, business-centered advantages, though, some of the state’s most controversial—and often criticized—policies and practices are precisely those that offer businesses of all sizes a more favorable climate in which to operate.
State air-quality laws and legislation—a hot-button issue for the pros and cons of California business performance—offer a prime case in point. There’s no question that California has long been a leader in innovative air-quality policy in the U.S. The state’s unique geography, weather and population greatly impact air quality and the subsequent regulations put into place to protect it. But critics of the state’s anti-pollution policies are quick to condemn them as “burdensome” to business.
Much of that criticism tends to overlook how undesirable the state would be if it didn’t enforce strict air-quality regulations. In fact, California’s long history of commitment to climate and air-quality management harks back more than 120 years to 1903, when air pollution measures were first introduced to address horrible smoke emissions in California’s booming industrialized cities. Since then, continuous legislation to address the state’s air quality has been passed into law, culminating in the 2018 Coalition for Clean Air, a statewide organization working exclusively on-air quality issues.
To what effect? Wayne B. Gray is an economics professor at Clark University in Worcester, Massachusetts, whose research is focused on the economic impact of government environmental regulations. A few years ago, he authored an exhaustive study to assess the impact of environmental protection legislation on businesses, as well as on the public at large. “Environmental regulations do, in fact, raise production costs at regulated firms—though in most cases, the costs are only a small fraction of a firm’s total costs,” Gray said. But, overall, he added, “Environmental regulations have had enormous benefits in terms of lives saved and illnesses averted, especially through reductions in airborne particulates… The benefits to society from environmental regulation appear to be much larger than the costs of compliance.”
A better future
While the jury may still be out on California’s business climate, the state is charging ahead, operating at the higher end of the nation’s economic engine. What’s more, the California 100—an assemblage of the state’s leading thinkers, business leaders and academic scholars—engaged an exhaustive study to answer the following question: “How can we envision and catalyze a dramatically better future for our state, and how can we expand our capacity for research, policy innovation and collective action to make that vision a reality?”
As a part of their voluminous work, the group conducted a survey among leaders in California’s innovation and research sectors, with a heavy focus on academic and industry researchers, educators and business leaders. The survey asked respondents to report on what made them hopeful about California’s future directions, where the state could invest more, and how well policymakers understood and acted on the biggest threats facing the state.
The results clearly showed that the respondents are bullish about the future of California’s innovation ecosystem. But, at the same time, they see several important areas for improvement. Their key priorities include: 1) investing in research and technology to solve big problems facing the state, particularly with respect to climate change; 2) investing more in advanced tech manufacturing; 3) increasing investments in new areas of the state, particularly in places with higher educational institutions and research assets; 4) investing in racial and gender equity to unleash the state’s innovation potential; and 5) increasing the expertise of state government with respect to science and technology, including tech policy.
In his State of the State address last spring, Governor Gavin Newsom summarized his administration’s California roadmap, particularly in those areas that impact California’s economy and business climate. He said, “We are doing the hard work that will set the course for California’s future—remaking our system of public education; building more housing faster; increasing access to quality, affordable health care; protecting our climate; ensuring public safety; and investing in new industries that will change the world we live in, and put a new generation of Californians to work.”
With all its notable challenges, it’s clear that California plays the game at a level the 49 other states can only aspire to. The Golden State has all the tools, talent and visionary leadership to, in Newsom’s words, “return, restore and rebuild” the California dream, and make it “achievable for everyone who calls [this] great state home.” And that is certainly good for business.