CA Businesses Split for Utah

JULY 13, 2011

What do California-based companies Adobe Systems, eBay, Electronic Arts, Oracle and Twitter have in common? All have expanded over the past two years not in the Golden State, but in neighboring Utah.

Utah Gov. Gary Herbert makes no apologies for pursuing California companies. “We are lowering taxes and making the state business friendly,” he told Forbes magazine, “while California is doing the opposite with higher taxes and regulations that are nonsensical.”

The flight of five of California’s best known tech companies is not an aberration, according to Joseph Vranich, an Irvine-based business relocation expert. Companies are “disinvesting” in California at a rate five times greater than two years ago, he estimates.

That includes companies leaving the state altogether, establishing divisions elsewhere or choosing not to set up operations within California.

“California is such fertile ground, ” Vranich relates, “that representatives for economic development agencies are visiting companies to dissect our high taxes, extreme regulatory environment and other expenses to show annual savings of between 20 and 40 percent after an out-of-state move.”

The disinvestment trend Vranich identifies has risen to a level where it has gotten the attention of high-level state officials. Indeed, Lt. Gov. Gavin Newsom, chair of the state’s Economic Development Commission, currently is developing a plan to address California’s unfriendly business climate, which he will unveil by month’s end.

“California has got to get its act together,” he said this week, “when it comes to economic development and job creation.” Toward that end, he added, the state will establish a new agency later this year devoted to those purposes.

But what can Newsom do, what can a new agency accomplish, when lawmakers in Sacramento continue to enact legislation that raises the cost of doing business in California far beyond competing states like Utah?

The ‘Amazon Tax’

Just last month, for instance, Gov. Jerry Brown signed a state budget that forces online retailers to collect California sales taxes by expanding the definition of having a physical presence within the state.

Previously, “physical presence” meant bricks and mortar. It applied to retailers with actual (rather than virtual) stores that customers could visit in some shopping center or another.

Now, if a retailer even has affiliates in the state — individuals or companies it contracts with to steer prospective customers to its web site — the Franchise Tax Board considers that a physical presence subject to taxation.

The immediate result of California’s new law is that Amazon.com, one of the nation’s leading online retailers, severed ties with thousands of affiliates it had here in the Golden State, business partners that earned commissions of as much as 15 percent of each sale they brought to Amazon.

That is but one example of the kind of laws California has added to its books that are driving California businesses to states that don’t impose the higher taxes and nonsensical regulations to which Utah Gov. Herbert referred.

Jobs Killer Bills

Even now, the California Chamber of Commerce is tracking dozens of what it refers to as “job killer” bills, proposed legislation that threatens to hurt the state’s job climate and hamper its economic recovery.

Among the job killers are measures that would mandate an automatic annual increase in the state minimum wage, authorize the state’s 58 counties and more than 1,000 school districts to impose or increase taxes on products and services (subject to voter approval), ban food vendors from using polystyrene foam food service containers and eliminate the right of businesses to appeal court orders denying or dismissing petitions to compel arbitration.

Those measures would mean higher labor costs, higher local taxes, the elimination of manufacturing jobs and more in-court cases (rather than less costly out-of-court mediation).

And while most of the several dozen bills deemed unfriendly to the state’s business community will not be enacted this year, some will. And many, if not most, of those that fail this year will be reintroduced in the Legislature next year.

All of this plays right into the hands of Gov. Herbert of Utah, and officials in such states as Arizona, Nevada, Colorado and Texas, all of which are poaching overtaxed over-regulated California businesses.

The Golden State’s loss is their gain.

— Joseph Perkins