California Ranks Dead Last on Small Business Policy Friendliness

By at 9 February, 2017, 10:51 am

The Golden State no more? Startups and firms are fleeing California, which ranks at the very bottom on SBE Council’s “Small Business Policy Index 2017.”

by Raymond J. Keating-

Small Business Policy Index 2017: California ranked dead last – that is, 50th – among the 50 states.

SBE Council’s “Small Business Policy Index 2017” ranks the 50 states according to 55 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2016: California ranked last – that is, 50th – among the 50 states.

SBE Council’s “Small Business Tax Index 2016” ranks the states according to 25 different tax measures. Among the taxes included are income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.

So, why is the government in California waging a policy war against entrepreneurs and small businesses?

Some might say that “war” is a strong word, but policy after policy seems designed to raise costs and diminish incentives for starting up, building and investing in a business in the Golden State. That’s unmistakable in SBE Council’s “Small Business Policy Index 2017: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship.” California came in dead last among the 50 states, and it really wasn’t even close.

While California offers a few positives – such as the lowest unemployment tax, a relatively low level of state and local government employment, and no death tax – these are swamped by so many significant policy negatives.

Among those negatives, California imposes the highest personal income and individual capital gains tax rates, and has high corporate income, corporate capital gains, gas and diesel taxes, the second heaviest energy regulation burden, the highest workers’ compensation costs, high levels of state and local government spending and debt, alternative minimum taxes, an added minimum wage mandate, and very poor protections against eminent domain abuses. It also is not a right-to-work state.

All of this works against business, and in particular, the entrepreneurial sector of the economy.

Sure, there are many other positives for the state – such as its diverse, natural beauty stretching up and down the West Coast, a great university system and access to skilled human capital – but in terms of policy decisions, the hostility is quite clear.

California officials seem to think they can hang onto their businesses because of its natural beauty and entrepreneurial hot spots, such as Silicon Valley, but firms are leaving in droves.  So are the people and startups due to high living costs, which include of course, oppressively high taxes. Not surprisingly, the top destination for firms leaving the state, according to Spectrum Locations Solutions, is the state of Texas, which ranks #2 on our Small Business Policy Index 2017.

California has been a top state in recent years at exporting people to other states. Indeed, net domestic migration, or the movement of people between the states (that is, excluding births, deaths and international migration), is a telling phenomenon, and from 2010 to 2016, California’s net domestic migration registered -383,344 – with only New York and Illinois coming in worse.

While the California economy generally has performed better than some other parts of the country during this poor period of economic recovery/expansion, imagine how much more robust entrepreneurship, small business development, economic and income growth and job creation would be if state lawmakers were, in fact, not heaping more fees, taxes and regulations on the entrepreneurial sector of the economy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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