Fisher Investments Editorial Staff
Capitalism, Taxes, US Economy

California Dreamin’

By, 08/12/2008

Story Highlights:

  • California was recently ranked by corporate executives and their advisors as having the least favorable business climate among US states. 
  • Regulation, an anti-business climate, and high costs were cited as reasons for the ranking.
  • Have Californian politicians forgotten the more you tax something, the less you get of it? 
  • Businesses and labor are generally free to travel across state lines to where business and tax environments and rules are the most wallet-friendly.

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California has a long-held golden mysticism. From yellow metal ore in its streams to yellow rays of sunshine along its coasts, California lured with promises of golden opportunity. Perhaps it's not surprising the Californian economy ranks among the top 10 in the world by GDP.

But the golden promises of yesterday have faded to gray. (Or, if you're talking budgets, red.) You see, California was recently ranked by corporate executives and their advisors as having the least favorable business climate among US states. Large percentages of those surveyed cited regulation, an anti-business climate, and high costs as reasons.

Seemingly blind to the business situation, state politicians are proposing to further increase the top marginal income tax rate from 10.3% to 12% and the corporate income tax rate from 8.4% to 9.3%—even though Californians already pay some of the highest taxes in the US. And it's not just California that's guilty of high taxes—it's New York, Massachusetts, and others.

Raising taxes to get more tax revenue is perverse any which way you look at it. Call us Laffer Curve fanatics if you must—but no matter your politics or economic interests, it's generally well known the more you tax something, the less you get of it. This punitive and constrictive feature of tax policy clearly eludes the sensibilities of the politicians in the Golden State.

California as No. 1
By Editorial Staff, The Wall Street Journal

Golden State Drives Businesses Out
By T.J. Rodgers, The Wall Street Journal

Anti-Business States Awash in Red Ink
By Steven Malanga, Forbes

But not all states are so repressive to capitalism's animal spirits. Washington and Colorado are competing tooth and nail, doing what they can to attract more businesses to domicile within their borders. They realize the more firms they attract, the more jobs, consumption, tax revenue, and general prosperity will be gained for their states. And they don't have to look far for unhappy CEOs and employees—the smothering Californian environment is driving away both business and people in droves.

Businesses and labor are generally free to travel across state lines to where tax environments and regulation are most friendly. After all, any extra costs associated with doing business—regulation, taxes, or otherwise—hits companies where it matters most: their bottom line. And we know of no worker who looks favorably on paying ever higher income taxes. It does well for states to attract businesses and workers since they bring with them the forces to stimulate the local and state economy. States that recognize and address business and worker concerns are reaping benefits where other states who do not, like California, are counting losses. This isn't just a lesson in domestic economics. Precisely the same is true on a global scale between countries. The basic tenets of global competitiveness differ little from trade between states. And in a globalizing world, where many countries are aggressively competing for business, goods, labor, and services, we suggest the states take a cue.

American literature, song, folklore, and film have chronicled California's allure for centuries, but its next inspiration role may just be a nostalgic look at what was. Scratch away that golden exterior and you may find an economy now tarnished by years of anti-competitive regulation and taxes.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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