Credit: Kyle Calzia
For years, California has been a thriving market for emerging companies. However, the Golden State has since had to compete with neighboring states to keep companies from leaving. The California Policy Institute counted more than 237 businesses that have left the state since 2005. Among these businesses were eleven Fortune 1000 companies, such as McKesso. The economic impact from these departing companies is likely to be expansive.
California’s tax laws and prohibitive regulations are the leading causes of the massive corporate exodus. The business-friendly conditions, opportunities to save costs, and home-ownership options for employees in other states are a few reasons companies have decided to leave California. These factors led to the first population loss in California’s history in 2020. Many companies are choosing to pursue better opportunities for business in other states with many people following them. A clear indication of the corporate exodus is the business headquarter office losses in California, which has been steadily declining since 2018. More than 265 business headquarters are leaving California, with an average of 6.3 departing per month.
California has a progressive personal income tax law. Under California’s tax law, the more that an individual earns, the more they are taxed. Individuals can be taxed from 1 to 13.30 percent. Ultimately, the top 1 percent of Californians pay roughly 50 percent of the income taxes in the state. In addition, California’s tax rates are equally burdensome: the California corporate income tax rate is 8.84 percent and the state sales tax rate is 7.25 percent. Thus, California ranks number one in individual income tax rates and number six in corporate income tax rates throughout the United States. Due to these heavy taxes, it is no surprise that many corporations are leaving, while the majority move to the Lone Star state. While Texas ranks high in the prime destination for many of these corporations leaving California, the closer states of Nevada and Arizona have also been corporate headquarter hotspots.
Texas
As the state that ranks first in the United States for jobs gained through business relocation, Texas is observed to have a very desirable quality for many businesses. Texas is ranked first in the nation for jobs gained through business relocation, and has no corporate or individual income tax. With the addition of a lower state sales tax rate of 6.25 percent, it is no wonder that Texas became a prime destination for many California corporations. Although the state levies a gross receipts tax and a considerably higher property tax rate than California, the allure of not having to pay anything near the corporate income tax of California provides a good reason why some of the Fortune 500 companies (including Tesla and Charles Schwab) have packed up shop and headed south.
Arizona
Next to California, Arizona boasts a corporate income tax rate of 4.90 percent and a sales tax rate of 5.60 percent. Arizona’s low property tax rate has played a role in California residents moving to the state. The Greater Phoenix Economic Council’s CEO reported that California businesses can gain a 30 percent cost advantage in addition to the lower cost of living by moving to Arizona. Further, Arizona provides aggressive tax credits and an enhanced access to capital.
Companies that have left California for Arizona include: Unical Aviation, Sendoso, HomeLight, Viavi Solutions, and Align Technology. One company, NortonLifeLock (formerly Symantec Corp.), moved its headquarters out of California’s Silicon Valley to Arizona’s East Valley. The state has begun to gain a reputation as being the new Silicon Valley of the west, bringing tech companies such as LG Energy Solution to the area in a recent $5.5 billion battery manufacturing plant deal.
Nevada
Another state that California companies have flocked to is Nevada. Popular cities within the state for relocation include Reno, Henderson, and Las Vegas. According to the 2022 Kosmont-Rose Institute of Doing Business Survey, 2,832 companies moved to Las Vegas from 1990 to 2019. Las Vegas was the top destination for California companies to move within the state. Unlike California, Nevada’s state sales tax rate is 6.85 percent with no corporate income tax or levy on a gross receipts tax. Nevada’s laws have made it easier for businesses to operate out of the state. For example, the state does not have a warehouse tax, making it more cost-efficient for businesses to store inventory.
One business, TheDrop.com, moved from San Francisco to Las Vegas in 2018. The Company found that the cost to operate in Nevada was 50 percent less than in California. The Company calculated “income tax and state tax, worker tax, payroll tax, cost of salaries, [and] cost of living.” Due to the cost of living for employees, another Bay Area company, Terbine, a California tech startup, moved from San Francisco to Las Vegas. Beyond the cost of living, remote work has become more popular since the COVID-19 pandemic. Nevada has increased its workforce in addition to not taxing personal income, making it a prime location for California businesses to relocate.
Conclusion
In the end, the big corporate exit from California has its roots in the ability for the companies to do business in the Golden State. The initial reasons for many corporations and even individuals to move to California from the 1890’s all the way to the 2010’s was the pro-growth attitude and economic opportunities provided by the state. Throughout the years, California has since lost its appeal due to increased taxes and has made alternate states, like Texas, more suitable for California companies and businesses.
While not the only destinations for many corporations leaving California, Texas, Arizona and Nevada have made offers which these companies cannot refuse: the opportunity to thrive and grow. Historically, this offer stood in California for a long time, prompting many to move to the coastal Western state. Now, as that offer disappears and reappears in less taxed states, the question remains which state will become the next prime destination after Texas, Nevada, and Arizona possibly lose that potential in the future.
*The views expressed in this article do not represent the views of Santa Clara University.