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California — toxic for business

Unless Sacramento moves to improve the business climate, California's reputation as one of the country's most toxic business environments will make it hard for the Golden State to regain its luster.

November 14, 2011|By Wendell Cox and Steven Malanga

California's suffocating regulations have a lot to do with this discontent. A 2009 study by two California State University finance professors, Sanjay Varshney and Dennis Tootelian, estimated that regulation cost the state's businesses $493 billion annually, or nearly $135,000 per company. Additionally, dense and complex land-use regulations have driven up housing construction costs in the state, giving residents a double whammy: a stagnant economy and unaffordable home prices, even since the real estate bubble burst.

Taxes are another burden. According to the Tax Foundation, California imposes the nation's second-heaviest tax burden on businesses, and finance officers of major companies recently rated the state's overall tax environment the worst in the country, according to a poll in CFO magazine.

On top of taxes and regulation, the state can also claim what may be America's most expensive litigation environment for firms. The American Tort Reform Foundation recently named California one of the country's five worst "judicial hellholes," in part because state law allows trial lawyers to sue firms for minor violations of California's complex labor and environmental regulations.

Gov. Jerry Brown has declared that "California always comes back." But history shows that great states can decline. Some, like New York, which was the nation's economic engine before California, never regain their luster. The state's leaders need to acknowledge the message they are hearing from the local business community and consider ways to help the state regain its economic edge.

Wendell Cox is the principal of Demographia, a public policy consulting firm. Steven Malanga is senior editor of City Journal, from whose fall issue this article is adapted.

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