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APRIL 22, 2011
Wall Street Journal
By John Fund
It wasn’t your usual legislative hearing. A group of largely Republican California lawmakers and Democratic Lt. Gov. Gavin Newsom traveled here last week to hear from businesses that have left their state to set up shop in Texas.
“We came to learn why they would pick up their roots and move in order to grow their businesses,” says GOP Assemblyman Dan Logue, who organized the trip. “Why does Chief Executive magazine rate California the worst state for job and business growth and Texas the best state?”
The contrast is undeniable. Texas has added 165,000 jobs during the last three years while California has lost 1.2 million. California’s jobless rate is 12% compared to 8% in Texas.
“I don’t see this as a partisan issue,” Mr. Newsom told reporters before the group met with Texas Republican Gov. Rick Perry. The former San Francisco mayor has many philosophical disagreements with Mr. Perry, but he admitted he was “sick and tired” of hearing about the governor’s success luring businesses to Texas.
Hours after the legislators met with Mr. Perry, another business, Fujitsu Frontech, announced that it is abandoning California. “It’s the 70th business to leave this year,” says California business relocation expert Joe Vranich. “That’s an average of 4.7 per week, up from 3.9 a week last year.” The Lone Star State was the top destination, with 14 of the 70 moving there.
Andy Puzder, the CEO of Hardee’s Restaurants, was one of many witnesses to bemoan California’s hostile regulatory climate. He said 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 also one of only three states that demands overtime pay 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 have to pay a big tax,” Mr. Puzder told the legislators. “In Texas, it’s the opposite—which is why we’re building 300 new stores there this year.”
Other states are even snatching away parts of California’s entertainment industry. The Milken Institute, based in Santa Monica, Calif., reports that 36,000 entertainment jobs have left the state since 1997. The new film “Battle: Los Angeles,” which is set in California, was filmed in Louisiana.
“The red tape is ridiculous,” says Mark Tolley, the managing partner of B. Knightly Homes, which relocated to Austin from Long Beach in 2005. “Regulators see developers as wearing a black hat and the environmental laws have run amok.”
“I’m a pro-jobs Democrat,” Mr. Newsom told me. “My party needs to get back into the business of jobs.” Mr. Newsom says he’s developing an economic development plan to present to Gov. Jerry Brown, who he says “gets it” on the need for business-friendly policies. Mr. Newsom told me that what impressed him most about Mr. Perry and the Texas legislators was their singular focus on job creation.
California, by contrast, seems to constantly lose focus. Several Democrats who agreed to go on the Texas trip were pressured by public-employee unions to drop out—and many did. And just as Texas business leaders were testifying about how the state’s tort reforms had improved job creation, word came of California’s latest priority: On April 14, the state senate passed a bill mandating that all public school children learn the history of disabled and gay Americans.
One speaker from California shook his head in wonder: “You can have the most liberated lifestyle on the planet, but if you can’t afford to put gas in your car or a roof over your head it’s somewhat limited.”
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. It works today in seven states ranging from Colorado to Massachusetts. Of course, the Lone Star State has 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 Texas to keep expenditures in check. While it shares with California the challenge of a huge budget deficit this year, it’s expected to close it without raising taxes. Texas’s overall spending burden remains below what it was in 1987—a remarkable feat.
When Jerry Brown ran for president in 1992, he understood the distorting nature of the tax code and proposed a flat tax with deductions only for rent, mortgage interest and charitable contributions. He called it “a silver bullet” for the economy. Mr. Brown has since abandoned that idea, grousing recently to a state legislator that “the flat tax cost me the New York Democratic primary.”
But if California continues its economic decline, something Texas-sized in its ambitions may be called for— whether it’s a moratorium on new business regulations or a restructuring of the state’s dysfunctional unemployment compensation or litigation. Nothing less is likely to stem the outflow of businesses and jobs from the Golden State.
Mr. Fund is a columnist for WSJ.com.