Mixed Messages Is California driving away businesses--or setting an example for other states?

Over the past two years, some California businesses have risenin revolt. Complaining that state regulations and high utilityprices make doing business so expensive that it's nearlyimpossible to make a profit, business organizations petitioned thestate legislature for relief, blasted the op-ed pages of Californianewspapers, and, ultimately, helped throw Gov. Gray Davis out ofpower.

Aki Korhonen, president of PC-Doctor Inc., a software producer previouslyin the San Francisco Bay area, says, "All the things that gointo the business environment are more expensive [in California]. Acombination of factors makes business hard." So hard, in fact,that Korhonen, 34, moved his business to Reno, Nevada, in October2003.

Korhonen has a point. Because of its laws, California has someof the highest costs of doing business in the nation-costs thatfall hardest on the 1 million-plus small companies in the state.California employers pay roughly twice the national average inworkers' comp rates, and this fall, California'slegislature passed the Family Medical Leave Law, mandating mostemployers to provide health insurance to employees. Meanwhile, theCalifornia Chamber of Commerce estimates California employers paythe highest unemployment taxes in the nation.

Yet, experts say, it's unclear whether the ways in whichCalifornia forces businesses to change pushes many companies out ofthe state or limits growth. Though other Western states havelaunched campaigns to lure California companies-Colorado'sgovernor even takes personal trips to Silicon Valley to woofirms-no studies have shown that there's an entrepreneurialexodus from the Golden State. "Los Angeles and San Diegocounties show more businesses are being created than shuttingdown," says Joel Kotkin, an expert on the California economyat Pepperdine University's Davenport Institute for PublicPolicy in Malibu, California.

In fact, as Stephen Levy, director of the Palo Alto, California,Center for Continuing Study of the California Economy, notes,California's unemployment rate has risen less than the nationalunemployment rate over the past two and a half years. And overall,California's business costs aren't so high. A 2003 study bythe Federation of Tax Administrators, a research organization,revealed California has only the 13th highest corporate tax rate inthe United States; while a study by the Beacon Hill Institute atSuffolk University in Boston found California had the 16thfriendliest business climate in the nation.

In fact, many experts believe that California'sadvantages-such as proximity to Asian markets, high-qualityintellectual capital, a strong tradition of startup activity-stillmore than make up for the costs of regulations. Levy believes that,as the national economy recovers, California will outpace the restof the country in job growth. And, Kotkin notes, business is nowvery engaged in California politics, and new Gov. ArnoldSchwarzenegger has vowed to improve the state's corporateclimate, which should make future legislature morebusiness-friendly.

What's more, many states are following California'slead, increasing regulations to shape companies while trying tokeep business costs from going through the roof. California is oneof the first states to recognize it must create the high-value workforce it needs to develop new ideas and production overseas, saysWayne Schell, president of the California Association for LocalEconomic Development, a Sacramento advocacy group. Other states arenow passing laws that pay for job retraining for unemployedworkers, nurture startups and try to improve their humancapital.

Meanwhile, Kotkin says, "the people who moved fromCalifornia to Arizona, Nevada and Oregon [in the 1990s] carriedsome of the same ideas with them, and these states are catching upin terms of a regulatory environment." Indeed, other Westernstates are considering similar medical insurance laws andworkers' comp reforms similar to a bill that passedCalifornia's legislature this fall. Ultimately, other statesmay even warm to the idea of a celebrity keeping lawmakers focused:Pat O'Brien, co-host of Access Hollywood, is reportedlyconsidering running for governor in his home state of SouthDakota.