CXV: Reclaiming The Golden State: Improving California’s Business Climate

By: Courtney Judd

California was originally settled for the pursuit of gold.  The California Gold Rush of 1848 and the golden poppies that line the state’s landscape bred the nickname “The Golden State.”  California declared it the official state nickname in 1968.  Gold is associated with wealth and prosperity and the ability to achieve financial success – in this country – through the American Dream.  The current California business climate would suggest otherwise. Serious measures need to be taken to improve the poor business climate in California, so California business owners can rightfully reclaim the title of The Golden State for California.

 Unfortunately California ranks near the bottom for state lawsuit climates – at number forty seven according to the U.S. Chamber of Commerce rating for 2012.  In the category of “Treatment of Class Action Suits and Mass Consolidation Suits” California ranks last at number fifty.  As the largest state, California’s unsatisfactory rating for fairness and competence affects the most people and is especially detrimental to small businesses.  Mike Lapage from the Institute for Legal Reform reports that the state lawsuit climate affects where people choose to establish their businesses.  Fewer businesses locating in California means there will be less money circulating back into the California economy.

It is no secret that the California economy is still suffering and a poor quality state lawsuit climate is just one more factor that weighs down that economy. 

The alarmingly high unemployment rate in California is one further indication of a poor business climate in California.  As of April 2013, the Bureau of Labor Statistics reports that California has a -9.0% unemployment rate, which is 1.5% lower than the U.S.’s unemployment rate of -7.5%.  Estimates of 15% unemployment are not unusual form other non-governmental sources.

In addition to high levels of unemployment, California is one of the most heavily taxed states.

The California Taxpayers Association states that California is the third worst state business tax climate in the nation with the state sales tax and gas tax ranking the highest in the U.S.  The Economic Modeling Inc. published a study in 2011 that asserts that California is the worst at job creation in the U.S.   In order to keep the state running the legislature and governor raised taxes.  Raising taxes imposes further pressure on taxpayers who may have lost their jobs and either remained unemployed or else settled for lower paying jobs, meaning they have two significant sources of income loss, which are lower wages and higher taxes.  The phenomenon may cause employers and employees to move out of state to work elsewhere, where there are less taxes and less unemployment. Many tax increases are “soft or hidden taxes” such as lien filing fees and increased benefits for public sector employees raising workers’ comp costs for public agencies.

Since California has consistently ranked near the bottom on the state lawsuit climate rating for the past ten years when the U.S. Chamber of Commerce Institute for Legal Reform started keeping track of state lawsuit climates, it would be wise to evaluate why California ranks so poorly and how it can improve the business climate.  Improving the state lawsuit climate rating will make California a friendlier place for businesses, which will decrease unemployment and increase the amount of money circulating in the California economy.  It will also increase tax revenues to the government.

It is notable to contrast California’s ranking on state lawsuit climate with that of Delaware’s ranking.  Delaware has consistently ranked number one for the past ten years.  Delaware’s unemployment rate is lower than the U.S.’s employment rate at -7.2%, which means there -1.8% more people unemployed in California than in Delaware.  Delaware is known for its low taxes since the early twentieth century, according to NY Times journalist Leslie Wayne in her article “How Delaware Thrives as a Corporate Tax Heaven.”  Delaware has chosen to make business-friendly tax and corporate laws in order to encourage businesses to move from New York and New Jersey to Delaware.  Delaware is so eager to attract businesses that its office for the secretary of state remains open until midnight Monday through Thursday and until 10:30 p.m. on Friday.  It also takes less than an hour to incorporate a business in Delaware.  Interestingly there are more corporate businesses in Delaware than there are people.  Delaware is one of the few states that has not suffered significantly during the recent economic recession of the U.S.   Delaware does not tax corporations and allows multi-state corporations to shift their taxes to Delaware in order to lower their taxes in other states.  This provision is known as “the Delaware loophole.”   This loophole attracts larger businesses to come to Delaware in addition to small businesses.  Nevada, Oregon, and Wyoming also operate similarly.  They all rank much higher than California in the state lawsuit climate.

The fact is that Delaware consistently ranks well on the state lawsuit climate and California ranks near the bottom.  It is true that Delaware has been widely criticized for making it too easy for businesses to incorporate and for allowing tax relief through “the Delaware loophole” that takes away revenue from other states.  Some people claim that Delaware tends to attract criminals who are laundering money and other fraudulent activity, but those crimes occur throughout the United States.  It still holds true that Delaware offers businesses an attractive business-friendly environment, which provides tax relief designed to encourage businesses small and large to settle there.  California should consider improving its state lawsuit climate, lowering taxes, and improving its overall business climate.  Such reforms would likely result in more business, more revenue, and less unemployment.  It then would live up to its claim as “The Golden State” once again.


Editors Note: Courtney Judd is working as a summer intern for us. This editorial was submitted (and researched) on her own. Few changes were made to her writing. She is returning to Brigham Young University in the fall.


PUBLISHERS' NOTE: Publius is written by a consortium of writers, sometimes internal, most frequently external. Workers' Comp Executive believes that it has the responsibility to air most viewpoints and welcomes the comments of its community on any subject. Publius does not necessarily represent the views of this publication.