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Reason Foundation

Los Angeles Business Journal

California, Los Angeles Drowning in a Sea of Taxes, Regulation, and Debt

Public Knows Burdensome Regulations Are Sending Jobs to Other Cities and States

Adam Summers
December 3, 2012

Business owners certainly know it, and it appears the general public knows it as well: Burdensome state and local taxes and regulations are hindering economic growth and opportunity in Los Angeles and throughout the state.

According to an October Reason-Rupe poll, nearly two-thirds—65 percent—of Californians say the laws and regulations passed by the state Legislature make it more likely that companies will move their jobs to other states. Just 24 percent believe the laws and regulations passed by legislators help to create jobs within California.

In addition, 62 percent say that if the Legislature didn't pass any laws or regulations for the next year, it would actually help the state's economy or make no difference on it.

This realization didn't prevent voters from approving two more tax increase proposals during the November elections, however. Threatened with significant cuts to education funding, voters passed Proposition 30, which will impose roughly $50 billion more by raising personal income taxes on those earning at least $250,000 a year for seven years and increasing sales taxes paid by everyone for four years, and Proposition 39, which will levy an estimated $1 billion a year on out-of-state businesses.

Nevertheless, critics—and even some supporters—of the tax increases have acknowledged that the tax increases will make the state less competitive and hurt its already woeful business climate. While State Treasurer Bill Lockyer supported Proposition 30, for example, he also noted that by driving up tax rates, the state risked losing businesses and employees to lower-tax states, saying, "The potential for out-of-state migration is substantial enough that we have to be very sensitive about those (tax) rates."

Entrepreneurs and workers are already fleeing from California. A Dun & Bradstreet report found that between January 2007 and October 2010, more than 2,500 employers left California, costing the state approximately 109,000 jobs. The reason is no secret: California's business climate remains among the very worst in the nation. The state has placed dead last in Chief Executive magazine's Best/Worst States for Business survey for the last eight years. Even before the passage of Propositions 30 and 39, California had the highest sales tax rate in the nation, the second-highest personal income tax, the eighth-highest corporate tax rate, and the highest gas tax rate (tied with New York state).

Leaving California for Texas, which has ranked first in Chief Executive business climate surveys for the past eight years, can reduce a business's costs by 40 percent.

Right here, Los Angeles is home to arguably the worst local business climate in the state. Joe Vranich, head of Spectrum Locations Consultants, a company that specializes in business location and relocation consulting, has calculated that businesses leaving Los Angeles for surrounding areas can shave 20 percent off their costs.

Like the state, Los Angeles is struggling mightily to contain spending and balance its budget. The city's solution? Hike taxes and fees, of course. In July, the City Council raised zoo fees for the fifth time in five years, and jacked up parking fines for the sixth time in seven years. Earlier this month, the City Council voted to place a half-cent local sales tax increase on the March 5 ballot. If approved by voters, this would increase sales taxes in Los Angeles from 9 percent to 9.5 percent, which would be one of the highest rates in the state.

At some point, city leaders are going to have to admit that the current path—more taxes, more fees, more regulations, more fines, and more spending—isn't working. Los Angeles and cities across the state can reverse the trends and help foster private-sector job creation and economic growth by curbing their appetite for regulating everything from food trucks to pornography producers.

Los Angeles and California need businesses to invest here. Instead of searching for new ways to tax businesses, find ways to work with them. For example, the Reason-Rupe poll found 64 percent of Californians think the government should partner with private companies to fund, build, and expand highways, airports, and other infrastructure. City and state governments can do more of that, and cut red tape and bureaucracy.

Los Angeles has innumerable positive attributes going for it. But until the city and state view economic growth and the creation of private-sector jobs as the best ways to build the economy, their onerous regulatory environments are going to make it difficult to lure the private investment needed. Doing more of the same is simply no longer an option. How about we try economic freedom instead?

Adam B. Summers is a senior policy analyst at the Reason Foundation in Los Angeles, a free-market think tank. This column originally appeared in the Los Angeles Business Journal (registration/subscription required).


Adam Summers is Senior Policy Analyst


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