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Deep in the heart of taxes
Taxes on businesses are increasing, too. In the past six elections California voters have approved more than 800 local taxes on businesses and residents, according to Larry Kosmont of Kosmont Companies, an economic advisory firm. (This does not include votersʼ decision to raise the income-tax rate on the stateʼs highest earners.) For example, last year voters in San Francisco approved the controversial Proposition C, which taxes businesses with more than $50m in gross revenues to fund services for the homeless. Companies with fat profit margins can afford higher taxes, but lower-margin businesses cannot, and these are the ones most likely to consider an alternative location.
Third, Texas has pursued a concerted strategy of wooing and cultivating businesses, whereas California has not. This began with Rick Perry, who served as Texasʼs governor from 2000 to 2015. He travelled to California and other states on “hunting trips” to poach businesses, ran ads on radio encouraging people and companies to move, and offered large incentives to create jobs in Texas. Mr Abbott has continued with these pro-business policies and still operates a “deal-closing fund” to incentivise businesses to come. He is a cheerleader for his stateʼs advantages, including low costs, a central location with good airports and a convenient time zone for doing business with both coasts. He describes Texas as “the quintessential free-enterprise state”. California has not done enough to pursue an economic strategy of its own. “I think we rested on our laurels a bit. We put up our feet and talked about the old days,” admits Mr Newsom. Yet when governors from other states come to California to pitch a relocation, the state still does not intervene to retain companies, which sends the message that it is indifferent, says Barry Broome of the Greater Sacramento Economic Council. The reality of doing business in California, with heavy regulation across most industries, is a fourth disadvantage. For example, the state has some of the most burdensome occupational licensing requirements in America, even for lowand moderate-income jobs, such as tree-trimming. “Itʼs easier to do business in Cuba than San Francisco,” says the boss of one of the Bay Areaʼs most prominent tech firms, which operates in both places. CNBC, a news company that rates Americaʼs states for business, has ranked Texas as first and California as 25th. California has a more educated workforce and stronger innovation, but when it comes to commercial “friendliness” and the cost of doing business, it is in last place and third-to-last place respectively. The heavy cost of regulation is evident in property and contributes to higher prices for homes. You can get a building permit within a few months in Texas, but it can take years in California, where the environmental-review process can be lengthy and lead to expensive lawsuits. “Iʼm an environmentalist, but itʼs completely crazy what happens here. The planning commissions slow-walk everything,” says the boss of one of Americaʼs largest technology companies, based in Silicon Valley. Red tape takes a toll on small firms, too. “If you have the balance-sheet to fight through it, you can make money, but you have to be big and well-capitalised to do business in California,” says Mr Perot. “A little guy canʼt survive. Thatʼs the irony of the politics.” Property projects that use public funds or subsidies, including below-market-value land for affordable housing, must pay “prevailing” wages for workers, which can add 15-25% to the total cost, says Mr Kosmont. This does not happen in Texas. The tech boom has created huge wealth disparities. Local anger and insistence on business contributing more to society could result in extra taxes and red tape. Already San Francisco is one of the few cities in America where “civic leaders openly flay their most successful progeny and throw so many roadblocks in front of young companies,” says Michael Moritz of Sequoia, a leading venture-capital firm. “It makes states and countries that roll out the carpet and offer a welcome to businesses exceedingly attractive.” Tools that Silicon Valley has produced, such as email, video conferencing and messaging, make it possible to work remotely, which will help more companies expand in less expensive states. So far the wealthy have accepted Californiaʼs tax increases without moving en masse. The state boasts many assets, including a long coastline, a global and educated elite, top-tier universities and a concentration of tech expertise. However, its long-term fiscal health is precariously balanced, because it relies on a small number of people to pay for an extensive system of benefits. The top 1% of taxpayers account for 46% of all personal-income tax and 35% of Californiaʼs general-fund revenues, according to Gabe Petek of the Legislative Analystʼs Office, an independent fiscal monitor. Because personal-income tax is the main source of revenue, Californiaʼs fortunes ride on the stockmarketʼs performance. The state has the fifth most volatile tax system of any American state, according to the Pew Charitable Trusts (Texas ranks 21st). Facebookʼs initial public offering in 2012, for example, alone contributed $1.9bn in tax to Californiaʼs coffers. In 2016 the state collected $1bn from a single zip code in Palo Alto. Such concentrated bounty can be welcome when times are good, but it leaves the state more vulnerable when the market falls. Today the state has around $20bn in reserves to withstand a slowdown, but even a mild recession would wipe that out within a single year, says Mr Petek.
and shrink the triangle back to original.