When Public Storage announced this year it was moving its longtime Glendale headquarters to a Dallas suburb, the self-storage leader said it wanted to benefit from the “depth of talent and innovation in that market.”
A year earlier, Realtor.com said the listing site’s move from Santa Clara to Texas reflected the state’s understanding of the crucial role business plays in “personal growth, professional success and community achievement.”
And in 2024, energy giant Chevron, whose roots in California date to the dawn of the oil industry, moved to Houston, where it said it would be best positioned for “long-term growth” and could operate more efficiently.
Three companies in three different industries, but they weren’t aberrations.
They were among thousands of firms that have moved to Texas and other states in recent years even as California remains a magnet for AI, aerospace and other tech startups, attracting hundreds of billions of dollars of venture capital.
Gov. Gavin Newsom has trumpeted how tech investments have super charged the world’s fourth largest economy to grow 5% last year, reaching $4.25 trillion. But there are indications the prosperity is not being spread evenly, with the state suffering a net loss of businesses over the last decade or so.
Among the complaints are the steep costs of doing business, a thicket of regulations in any number of industries and high housing prices that have driven up wages — prompting nearly 230,000 more residents to move to other states than move in to California last year, according to the U.S. Census Bureau.
The challenges have provided fodder for critics of how Democrats have run the state since obtaining a supermajority in the Legislature in 2018, when Newsom was elected. GOP gubernatorial candidate Steve Hilton maintains that California is the “worst run state” with the “most hostile business climate” in the country.
Economists and other experts don’t necessarily agree with that assessment, but said the challenges have left California vulnerable to steep competition from other states, which have begun chipping away at its economic dominance.
“There’s no question that California has so many powerful business climate assets — connectivity to the global marketplace, 840 miles of coastline, top-tier research universities, next generation centers of excellence in high growth industries — you name it,” said John Boyd, a corporate relocation specialist based in Boca Raton, Fla.
“But the trend is real. These companies have other options today, and they’re realizing that when their peers successfully relocate to Dallas or Phoenix or Miami or to Nashville, they see the company thriving,” he said.
When businesses leave
A Public Policy Institute of California study released last year found that between 2011 and 2021 the state spawned 23,800 companies — far more than it attracted or lost.
But movement out of the state, compared with businesses arriving in California from other places, is a concern. The state has been on the losing end of that equation since 2014, according to the Bureau of Labor Statistics. In 2023, the latest date for which statistics are available, 533 more companies left the state than entered.
Other high-profile businesses that have moved headquarters in recent years even as they retain operations in California include database giant Oracle, developer KB Home, real estate brokerage CBREand Elon Musk’s Tesla and SpaceX. The departures include midsize firms and small businesses too.
Earlier this year, for example, Digital Brands Group moved its headquarters and distribution operations from an old 42,000-square-foot facility in Vernon, where it had been for nearly a decade, to a new 70,000-square-foot building in the Austin suburb of Round Rock.
Hil Davis, chief executive of the apparel company, which recorded $7.4 million in revenue last year but piled up losses, said the relocation was driven by both costs and logistics.
The company will still work with sewing contractors in the Los Angeles apparel industry to make its clothing, but the Texas location is more suited for a new business selling licensed collegiate wear, with the biggest buyers in the Southeast.
Digital Brand Group’s lease for the larger building, in which it is the first tenant, costs the same as what it paid in Vernon, while payroll and sales taxes are lower. Employees also will benefit from lower housing and commute costs.
“It’s just the easiest math you’ll ever do,” Davis said.
History of growth and regulations
California enjoyed extraordinary post-World War II economic growth that saw its population and gross domestic product explode, driven by industries such as manufacturing, aerospace, entertainment and agriculture.
That slowed in the early 1990s, though, when the Cold War’s end ushered in an era of lower Pentagon spending. That led to defense-related job losses topping 300,000 statewide, industry consolidation and a series of headquarters departures starting with Lockheed Martin in 1995 that left state boosters wringing their hands.
Nonetheless, California rebounded from that blow, with the state becoming the epicenter of innovation in the new internet economy, minting trillion-dollar companies such as Apple and Google. The expansion of international trade, especially with China, also was a big driver of growth with the state’s well-positioned Pacific Rim ports.
The PPIC study, which examined the growing numbers of business relocations, found that the firms leaving California tended to relocate to states with lower taxes and less regulation.
Much of the regulatory ire has been directed at the landmark California Environmental Quality Act, signed into law by Gov. Ronald Reagan in 1970. That followed the emergence of the environmental movement and public outrage over a massive oil spill off the coast of Santa Barbara.
The new environmental law initially only required the impacts of proposed public projects to be mitigated, but a court ruling expanded its scope to private developments requiring discretionary government approval. That triggered lawsuits that can raise the cost of developments and grind them to a halt in years of litigation. Critics argue the law has been hijacked by NIMBY activists without real environmental concerns.
California is among a minority of states that have such acts, unlike rivals including Texas, Tennessee and Florida, which do not.
Recent legislation has sought to broadly reform the law, including overhauls last year that speed up CEQA-related litigation and make it harder to trigger full-scale reviews, drawing outrage from environmentalists. Proposition 45 on the Nov. 3 ballot, supported by builders, would weaken it even further.
Beyond CEQA, California’s regulatory regime is the most restrictive in the country.
A PPIC study released in December found that the number of business regulations in the state totaled about 1,300, with the average business subject to eight, falling broadly in the categories of environmental, health and industry.
Those figures placed the state in the median range. However, when counting the occurrences of words such as “shall,” “required,” and “prohibited” within those regulations, it found the average business was subject to 3,700 constraints, the most nationwide and far above the nationwide median of 1,400. Other studies have reached similar results.
Texas, surprisingly, was the fourth-most regulated state in the nation with about 2,900 restrictions, possibly driven by its oil, gas and petrochemical industry, the largest in the nation, though researchers at the PPIC haven’t studied that issue.
California has long prided itself as a regulatory trailblazer, whether to preserve its coastline, reduce air pollution, protect gig workers, ensure data privacy or battle climate change. But David Neumark, a UC Irvine economist and co-author of the PPIC study, said the findings indicate California could be ripe for a broad regulatory review.
“I certainly think if a new governor were to say, ‘We’re going to really scrutinize regulation,’” Neumark said. “If it’s not doing anything, or if there’s good reason to believe the cost outweighs the benefit, which I’m sure it does in some cases, let’s get rid of it instead of keeping it. But that doesn’t mean we would jettison all our regulations.”
High taxes, high costs
Any discussion of California’s high cost of living typically starts with the tax burden and includes housing costs.
The Tax Foundation, a nonpartisan tax research group in Washington, D.C., ranks the state 48th in its annual business competitiveness index, with only New Jersey and New York trailing.
That ranking is driven by the nation’s top personal marginal income tax rate at 13.3%, as well as high and broad sales taxes, and a high corporate tax rate. Those levies outweigh California’s median-level property tax rate, held down by Proposition 13, the landmark law that limited them in 1978.
Texas is ranked as the seventh best place to do business despite higher property taxes, largely due to the fact it does not impose a personal income tax.
One benefit of California’s tax system is that it is among the least regressive in the nation, with low- and middle-income families not paying higher rates than wealthier ones, while it supports higher social services such as expanded Medicaid access for the poor, according to studies by the Institute on Taxation and Economic Policy, another Washington, D.C., tax policy group.
Jared Walczak, a senior fellow at the Tax Foundation, acknowledged California’s higher social safety net spending. He said it’s a tax burden that tech, defense and entertainment businesses tolerate due to California’s deep talent pool and agglomeration of companies in those industries.
Even so, the high marginal personal income tax rate can hurt California because it is business leaders who often pay the top income taxes and determine where to locate a company. “Texas has lower taxes on the margin where decisions are made,” he said.
The debate over California’s taxes has reached a fever pitch in advance of the Nov. 3 election, when state voters will consider approving Proposition 40, a one-time tax on billionaires to help fund health services. It has prompted several billionaires to move their official residences out of state, reportedly including Google co-founders Larry Page and Sergey Brin.
Grabbing nearly as much attention has been the state’s housing costs, which are the nation’s second highest behind Hawaii. In September, the state’s median home price was $752,837 compared to $329,054 in Texas, according to Redfin. Average monthly rents in October showed a similar disparity at $2,290 and $1,242, according to apartments.com.
California’s price premium has grown compared to the rest of the country, according to the nonpartisan state Legislative Analyst’s Office, which has traced the trend to multiple factors over decades, including more limited land availability in L.A and other urban clusters, obstacles created by CEQA and rezoning of residential property to restrict density.
In recent years, California has undertaken a series of efforts to boost housing production, such as reforming CEQA to make it easier to build infill developments, limiting local control over projects near mass transit hubs or commercial zones, and promoting accessory dwelling units on single-family lots — including a slew of housing bills this year, but their effectiveness remains to be seen.
Taxes and housing, of course, are far from the only costs businesses face in California.
Last week, a gallon of regular unleaded cost an average of $6.15 in California and $3.778 in Texas, while a gallon of diesel was $8.50 in California and $5.78 in Texas, according to the American Automobile Assn.
The reasons for California’s highest in the nation fuel costs include high taxes per gallon, a low carbon fuel standard, a special summer smog-fighting blend and the state’s limited refining capacity — none of which are issues that can be solved quickly.
The prices drive up transportation and operational costs for businesses, which also pay utility prices well above the national average.
Californians’ power costs were close to the highest in the nation in 2024 at 158% of the national average, driven in part by the utilities’ legal expenses due to massive wildfires started by their power lines, as well as projects modernizing the grid and reducing those risks.
By contrast, Texans paid 87.5% of the average, according to the most recent available statistics from the federal Bureau of Economic Analysis.
For businesses looking for a good chunk of land to build a manufacturing plant, Texas holds a further advantage. Midsize industrial sites of five to 20 acres cost $6.51 a square foot on average in California, nearly three times higher than the $2.28 a square foot price in Texas, according to data provider CoStar.
Constructing on the site amplifies the difference. A 90,000-square-foot brick and steel factory will cost a company a little under $18 million in Austin or Dallas, while the cost is about $25 million in L.A. and even higher in San Francisco, according to data provider Gordian.
Those kind of costs — as well as lower housing prices for employees and faster regulatory approvals — prompted Torrance defense startup Castelion to choose New Mexico for a 1,000-acre site and plant where it could safely test and mass-produce the rocket-powered hypersonic missiles it is developing.
While the company is keeping its headquarters in Southern California, co-founder Andrew Kreitz told The Timesearlier this year that the defense contractor will now have two hubs, though the preference would have been to retain operations locally.
“If there were a way that we could have done that cost effectively and move quickly, I think we would rather done that,” he said.
Driving higher wages
The state has taken a number of steps to cut red tape, including legislation to speed small-business permitting. California’s economic development program, known as GO-Biz, also has doled out more than $1 billion in job training, grants, tax credits and other programs to retain companies and attract those from out of state.
Then there is California’s high wage scale, which is driven by not only unions bargaining for fair compensation but also the state’s high cost of living.
The average hourly wage in California was $42.54 an hour in August, higher than the national average and the $36.37 wage of Texas, according to the Bureau of Labor Statistics. Some, but not all, companies can bear the higher compensation.
Varda Space Industries in El Segundo is developing pharmaceuticals in the microgravity of space and has defense contracts to test military hypersonics as its capsules return to earth at Mach 25+. Operating at aerospace’s cutting edge, it pays what it must for talent, with some engineers making $200,000 or more.
“Our comp philosophy is market rate salary, heavy equity because this is a culture of ownership,” said chief executive and co-founder Will Bruey, who also recently decided to expand the company in El Segundo. “Keep the engineers close to the assembly line,” is his operating principle.
While there are multiple reasons for the state’s higher relative wages, economist Chris Thornberg believes that housing costs are far and away the largest factor, hurting many California businesses. Building more housing would go a long way toward solving the problem.
“Ultimately, it boils down to labor and labor availability. In our high-cost, high-housing-cost economy, industries that hire a preponderance of high-income workers are going to be able to hack it. If you’re an industry that hires a lot of low-cost workers, well, it’s going to be more difficult for you,” said Thornberg, founding partner of Beacon Economics in Los Angeles.
Lindsay Murray, 37, who was living with her husband in an Oakland apartment that cost $2,300 a month, recently moved out of state to open up a business.
The experienced child-care professional had hoped to open a licensed, day care firm for special needs children at a home the couple wanted to buy before she expanded to a stand-alone facility. However, after a long search to find something affordable the couple gave up and moved to Raleigh, N.C., where her husband can work remotely.
The couple are now renting a three bedroom house with a large yard for $1,600 a month while they search for a home, which they are certain they can afford. She loved the Bay Area and didn’t want to leave but pursuing her professional goals was more important.
“The move was incredibly bittersweet,” she said.
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