Really, how hard is it to do business in California?

Really, how hard is it to do business in California?
Sam Zuckerman, Chronicle Economics Writer
Friday, September 26, 2003

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2003/09/26/MN35574.DTL

Gov. Gray Davis' California is a purgatory for business.

That's the charge heard over and over again from Arnold Schwarzenegger and Tom McClintock, and it was a central Republican theme in Wednesday's gubernatorial recall debate. Republicans cite a constellation of ills: high taxes, harsh regulation, a busted budget, a spate of "job-killer" bills in the state Legislature and a general attitude of government hostility toward business. And they maintain that employers are fleeing California in droves, taking thousands of jobs with them.

Democrats counter that during the recession, California has done better than the rest of the nation in preserving jobs. Moreover, the state leads the world in entrepreneurship and innovation and remains a vibrant place to do business, they say.

Independent analysts say California has indeed become a tougher environment for business in recent years, largely because of sharply rising electricity, workers' compensation and health insurance costs. Moreover, these higher costs hit businesses at the same time that the economy turned sour, when they were least capable of absorbing them.

"Our business climate is getting worse," said Ross DeVol, director of regional studies at the Milken Institute in Santa Monica. "But the reality is not as bad as somebody campaigning for governor on the Republican side says. And it's not as good as someone campaigning on the Democratic side says."

Some of the problems besetting business are due to factors beyond the control of the state's political leaders. Others, including higher electricity and workers' compensation costs, can be laid at many doors, including those of Davis, previous governors from both parties and the state Legislature, analysts say.

Business taxes in California are not unusually high, economists say. The state's 8.84 percent corporate income tax rate ranks 13th among the 50 states and the District of Columbia, according to the Federation of Tax Administrators.

Clark Well is a 123-year-old water drilling company in Stockton with seven employees. There is plenty of demand for Clark Well's services in the fast- growing Central Valley. But the company is hurting.

"In the last year, our health insurance went up 25 percent, our workers' compensation went up 20 percent. Those costs, you can't pass them along anymore," said proprietor Mike Clark. "We are busier than ever, but we are not making a profit."

ESTRANGEMENT
The issue of an unfriendly business climate has generated a level of hostility between organizations representing the business community and Democrats in Sacramento that stuns longtime observers of the political scene.

Business organizations accuse lawmakers of ignoring their concerns, insulting their members and driving employers out of the state by pushing anti- business initiatives. Davis, they contend, seeking to save his political skin, has bowed to anti-business Democrats in the Legislature.

Last week, a coalition of business groups gave California a grade of F for its business climate, citing, among other factors, legislation requiring employers to provide health insurance and paid family medical leave.

"Businesspeople are angry and frustrated. I've never seen such a level," said Alan Zaremberg, president of the California Chamber of Commerce.

Democrats respond that, in their search for scapegoats, business lobbyists have lost their credibility.

"When the economy is bad, we all feel compelled to point the finger," said state Sen. Jackie Speier, D-Hillsborough. "To presume the Legislature is not listening to business makes it seem that there is not an IQ in the chamber over 85. We are not that stupid."

Speier cites recent action to lower workers' compensation costs as proof that Democratic lawmakers are responsive to business.

BUSINESS FLEEING
As for the refrain that businesses are leaving California for happier climes, that amounts to "policy by anecdote," said Jean Ross, executive director of the liberal California Budget Project.

Of course, employers looking for cheaper places to do business have been leaving California for decades. But some economists say that's been offset by the state's superior record of business startups.

"California has been fortunate enough to have a net balance of new starts that in effect trumps the process that sets in when companies go out of business or move," said Michael Teitz, an expert on economics and regional planning at the Public Policy Institute of California.

The question now is whether businesses are leaving California faster than in the past. There are little hard data available, but there is some evidence that the pace of migration is picking up speed.

Chuck Alvey, president of the Economic Development Authority of Western Nevada, said he detects a new urgency in the calls he gets from California companies.

"The tenor in the last six months or so has been one of desperation," he said. "We're getting calls saying, 'We have to go out of state or we're going to go out of business.' "

The Greater Phoenix Economic Council says six California companies have inquired about shifting operations to the region in the past six months. That compares with three overtures during a similar period last year and four in 2001.

PC-Doctor, an Emeryville software firm with just under 50 employees, is moving to Nevada in October.

"There's no single reason," said Vice President Aki Korhonen. "It's a confluence of many small things. They keep on piling on all these small things and it makes a compelling case for a move."

BUSINESS COSTS
To sort out the business climate issue, it helps to separate those factors that have held sway in California over many decades from those that are recent.

California businesses have long paid a premium for labor and land. Compared with Phoenix, for example, Los Angeles manufacturing wages are 15 percent higher, while San Francisco wages are 21 higher, according to a Applied Economics, a Scottsdale, Ariz., consulting firm.

Building and lease costs are 27 percent and 67 higher, respectively, in Los Angeles and San Francisco than in Phoenix.

"Basic costs are higher in California," said Applied Economics partner Sarah Murley. "Has public policy caused this problem? I don't think so."

California also has long had a tougher policy on business regulation than most other states, reflecting in part the state's high environmental and land use standards.

KB Home builds houses in 11 states, mostly in the Sunbelt. In other states, the company can get construction permits in anywhere from four to nine months. In California, it can take as long as four years. Similarly, building fees per home can run up to $100,000 in California compared with a ceiling of about $4, 000 in other states.

"It really is like night and day," said Larry Gotlieb, the company's vice president for government and public affairs. Regulatory obstacles are "long- standing and getting worse every year," he added.

In fairness, some aspects of California's business environment are better for employers. The Corporation for Enterprise Development, a liberal economic development group, gives the state high grades for its investments in higher education and transportation, and its entrepreneurial vitality.

Businesses that locate in California are not ones looking to save pennies, but rather those that are drawn to the state by the vastness and wealth of its market. Or they come to take advantage of a technologically advanced and productive workforce, which has helped make the state the computer and biotechnology capitals of the world.

"California does fairly well," said Robert Friedman, chairman of the Corporation for Enterprise Development. "It's the quality of the human resources, the capital resources, the infrastructure."

Still, several factors have caused California's business climate to take a turn for the worse in the past few years. In addition to double-digit price increases in energy, workers' compensation and health insurance, the state's budget crisis has injected a major note of uncertainty into the environment. If Lt. Gov. Cruz Bustamante is elected, businesses face the prospect of significant tax hikes.

'JOB-KILLER' BILLS
This combustible situation has inflamed long-standing tension between Democratic political leaders and business groups.

Lobbyists for business are incensed about a long list of bills already approved or waiting consideration in the Legislature that they claim will destroy jobs.

They range from a just-approved bill requiring California companies with more than 20 employees to phase in health insurance to a measure that would restrict development of sites sacred to Native Americans.

"The Legislature is made up of completely ideologically motivated people who have no concern for business and don't understand that you can't have social programs if you can't pay for them," said Joel Kotkin, a conservative public policy expert at Pepperdine University in Southern California.

For their part, Sacramento Democrats say that business groups have turned obstructionist, opposing measures that make California a more decent society.

"Every time the Chamber of Commerce doesn't like a bill, they call it a job killer," said Assemblywoman Hannah-Beth Jackson, D-Santa Barbara.

"It's like the little boy who cried wolf. Workers' compensation is indeed a job killer. But when they come in and call the (Indian sacred sites) bill a job killer, they just lose their credibility. If you look at their job-killer list you'll see half my bills."

Independent analysts say calling individual measures job killers amounts to rhetorical excess. But they agree that the cumulative effects of a series of initiatives, including many that might be worthy in their own right, could do real harm.

"You can't impose costs willy-nilly," Friedman said.

FACTS OR FICTION?
Republicans charge that California has turned hostile to business under Gov.

Gray Davis. Here are the facts:

BUSINESS TAXES
California's corporate tax rate of 8.84 percent is the thirteenth highest among the 50 states and the District of Columbia, according to the Federation of Tax Administrators. The rate was reduced from 9.3 percent in 1997, before Davis took office.

BUSINESS COSTS
California has long been a high-cost place to do business. In the past few years, sharply rising costs for electricity, workers' compensation and health insurance have worsened California's disadvantage.

REGULATION
California's regulatory policies, such as stiff requirements for studying environmental effects of development projects, present greater obstacles than in neighboring states. However, many of those rules help preserve the quality of life that makes the state an attractive place to live.

BUSINESS EXODUS
It is impossible to document the charge that businesses are leaving California at an accelerated pace. Anecdotal evidence suggests that rising costs are prompting more businesses to consider relocating. That is offset by the number of business startups.

'JOB-KILLER' BILLS
The charge that bills in the state Legislature increasing mandates on business are killing jobs is an exaggeration at best. The costs imposed by these initiatives are in most cases much smaller than such factors as workers' compensation and energy.

HOSTILITY
Relations between business groups and Democratic lawmakers have sunk to low levels. Business groups say that estrangement makes it difficult for them to get a fair hearing in Sacramento. Democrats say that business groups have become shrill in their criticisms.Source: Chronicle staff report
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E-mail Sam Zuckerman at [email protected]