THE LATEST UNEMPLOYMENT NUMBERS show the economic recovery stalling. But as weak as the national economy is, it’s nothing compared to the condition of some states whose policies are guaranteed to scare away jobs and investment.
Call it the European Disease: Run up spending and debt, raise taxes in the name of balancing the budget, and then watch as jobs flee, deficits rise, and credit ratings fall.
Chief Executive magazine has just come out with a survey of 650 corporate CEOs on the business climate in their states. They ranked local conditions on a range of issues, including regulations, tax policies, work force quality, educational resources, quality of living, and infrastructure.
It won’t surprise anyone who has followed the annual survey to learn which state finished in the back of the pack, and which finished first. California was dead last in attractiveness to business for the eighth year in a row, while Texas came in first for the eighth consecutive time.
“CEOs tell us that California seems to be doing everything possible to drive business from the state. Texas, by contrast, has been welcoming companies and entrepreneurs, particularly in the high-tech arena,” J.P. Donlon, editor of Chief Executive, said in May during the survey’s release.
Indeed, with its malfunctioning economy, California is fast becoming an American version of Greece. It has an unemployment rate of 10.9 percent, the highest of all states save Rhode Island and Nevada. (April figures, the most recent available at press time.) Because of its generous benefit structures for the poor, California has a third of all welfare recipients in the country, even though it’s home to less than an eighth of the U.S. population. The Golden State’s environmental extremism results in electricity rates 50 percent higher than the national average.
Then there are taxes. Even middle-class families earning $48,000 a year pay a state tax rate of 9.3 percent, a higher rate than millionaires pay in 47 other states. A ballot measure backed by liberal legislators will ask state voters this fall if they want to raise the top rate on high earners to a staggering 13.3 percent.
Naturally, this economic version of Dante’s circles of hell has driven jobs from the state at an increasing pace. One relocation firm calculates that last year, a total of 254 California companies moved some of their work and jobs out of state—a number that is 26 percent higher than that of 2010 and five times higher than 2009.
Andy Puzder, the CEO of CKE Restaurants, the parent company behind Hardee’s and Carl's Jr., is just one of the many corporate leaders who have been traumatized by California’s hostile business climate.
He tells me it takes six months to two years to secure permits to build a new Carl’s Jr. Restaurant in the Golden State, versus the six weeks it takes in Texas.
California is one of only three states that demand employers pay overtime after an eight-hour day, rather than after a 40-hour week. Such rules wreak havoc on flexible work schedules based on actual need. If there’s a line out the door at a Carl’s Jr. while employees are seen resting, it’s because they aren’t allowed to help: Break time is mandatory.
“You can’t build in California, you can’t manage in California, and you are taxed to death,” says Puzder. *
Rather than raise taxes, Texas has contained them. It prides itself on having no state income or capital gains tax at all.
“Texas’ economy is far less volatile due to its having neither a progressive income tax system nor a large tax burden,” concludes “Rich States, Poor States,” a study by the American Legislative Exchange Council. Less volatility also allows the state to keep expenditures in check. Texas’s overall spending burden re mains below what it was in 1987—a remarkable feat.
The most dramatic reform California could make would be to change its boom-and-bust tax system so it doesn’t depend on a small number of wealthy residents who can flee the state. The idea would be to broaden the income tax base and lower the state’s high rates. The strategy is working today in seven states ranging from Colorado to Massachusetts.
Even California Governor Jerry Brown recognizes that the state’s tax system leads to up-anddown revenue cycles that hurt its economy. Its steep progressive tax system means that the top 1 percent of income earners pay between one-third and half of all state income tax revenues. Brown acknowledges that depending on the rich to pay the bills causes “more volatility” in revenue collections and thus “a more or less constant state” of deficits. Nonetheless, Brown is supporting the tax increase on upper earners on this November’s ballot.
CALIFORNIA'S AGONIES are likely to continue. But the Chief Executive survey contains good news for states that have the courage to implement real reform. For years, Louisiana’s policies were hostile to business and caused the state to lose population every year. But GOP Governor Bobby Jindal has aggressively moved to change that. In 2006, in the wake of Hurricane Katrina, the Chief Executive survey ranked Louisiana 47th in business climate—on the same level as Massachusetts. Now the state has moved up to 13th place, rising from last year’s 27th place—an astonishing turnaround.
Wisconsin, one of the most unionized states in the country, is also showing how just a few common- sense reforms can dramatically change business perceptions. Republican Governor Scott Walker has trimmed regulations and wiped out a budget deficit by reforming collective-bargaining laws so local governments can save money in contract negotiations with their public employees. The result is that the state’s business climate is now in the top 20—the first time that’s ever happened.
Asked by Chief Executive exactly why he thinks it so important to reduce business costs in his state, Governor Walker replied: “I’ve never seen a store get more customers by raising its prices, but I’ve seen customers knock down the doors when they cut prices.”
Of course, Governor Walker’s policies are still controversial—he faced a June 5 recall effort heavily promoted by public employee unions. The reason his victory is so important is that it sends a message to other governors that reform is not only possible, but that it will be validated by voters. Had he lost, far too many governors and other leaders would have concluded that the best political course is not to shake things up and leave the biggest problems for their successors.
* A quotation from the CEO of CKE Restaurants, which owns Hardee's and Carl's Jr. brands, originally overstated the company's growth in Texas. CKE plans to have 350 restaurants open in the Lonestar State by the end of the decade.