Taxes, Regulations, Business Births & California Pizza Kitchen: Why the Golden State Is in Trouble

Sunday evening I was mulling over data from the 2010 Census when my wife suggested we take our extended family out to California Pizza Kitchen.

Walking into CPK, I was still mentally processing the implications of the census data that showed what appeared to be a strong link between college educated Americans moving out of high tax states to low tax states (go ahead and laugh, yes, I’m really like that). When the menus came, my deepening melancholy for California’s self-inflicted tax wounds shifted to sadness due to the Golden State’s penchant for regulating all aspects of life. Why? I immediately saw that CPK’s shiny new menus were in violation of the California Health and Safety Code Section 114094, the law that requires restaurant chains to list “…the calorie content information for a standard menu item next to the item on the menu in a size and typeface that is clear and conspicuous.” Nary a speck of calorie data was next to any item on the menu (not that I cared about it, I don’t go to restaurants to count my calories – the information was available on request, nice, but not legal in California).

A full-blown case of Over Regulation Realization Depression hit me. California Pizza Kitchen, the quintessential California business, would be forced to reprint thousands of menus for their 67 California restaurants, or risk fines of up to $500 for each location: a $33,500 exposure for each local health inspector visit while out of compliance.

While waiting for my California Club Pizza (it was delicious enough to temporarily lift me out of my bad case of ORRD) my thoughts drifted back to the floor vote on SB 1420, the 2008 bill by Senator Alex Padilla (D-Van Nuys) that sought to impose the calorie counting mandate on business. I recall arguing against the bill which passed on a largely party line vote, Democrats for it, and Republicans mostly against it (then Senator Abel Maldonado was the sole Republican “aye” vote while some of the more moderate Assembly Republicans, Bonnie Garcia and Todd Spitzer, abstained).

Democrats justified calorie listing mandate by saying that big restaurant chains could afford it (the bill exempted chains with less than 20 locations), that some restaurant meals contained enough calories to feed an entire family for a week (or something along those lines) and that the bill was made less odious than it was initially so as to remove the opposition of the California Restaurant Association.

California’s thirst to proscribe as much as can be written into law is a major driver as to why Forbes magazine has consistently ranked the Golden State as having one of the worst regulatory environment ranks in the nation (in 2010, California was 43rd, just below Alaska and just above Hawaii).

By the time I got back home, my stomach filled with non-calorie disclosed black market pizza, I was ready to tackle the census data. As I poured over the information on state growth, I began to see a pattern between state tax policy and population growth.

According to the Tax Foundation, a non-partisan tax policy analysis organization founded in 1937, the states with the best business tax climates are South Dakota, Alaska, Wyoming, Nevada, and Florida. Texas, the second-biggest state, ranks 13. All five of the top states for business and Texas have one thing in common: no individual income tax, a tax which hits small businesses the hardest and small business is America’s employment engine.

The five worst states for business, beginning with the bottom, are: New York, California, New Jersey, Connecticut, and Ohio (although the governors of New York, New Jersey and Ohio, a Democrat and two Republicans, respectively, appear to be trying hard to reverse their states’ hostile business climates). These states are characterized by high and progressive state income taxes.

The 2010 Census showed that the average population growth in the five best states for business was 17.6%. Texas clocked in at 20.6% growth. Meanwhile, the five worst states for business from a business tax standpoint showed an anemic growth of 4.6%. America’s population grew at 9.7% from 2000 to 2010, meaning that the high-tax states grew at less than half of the national average while the low-tax states grew at about double the national average.

People really do vote with their feet (or moving vans).

Additionally, the U.S. Census Bureau tracks business creation. The worst five states for business saw a net loss of 86,587 in 2007 and 2008, the most recent period for which data is available. The pace of reported losses will certainly deepen with 2009’s numbers.

Business “Births,” as the Census appropriately names business creation, an act that measures entrepreneurially-minded people’s faith in the future, were strongest in the states with no income tax, with a net gain of 12,672 businesses in 2007 and 2008.

Texas saw the net creation of 19,702 businesses in 2007 and 2008. This, while California saw a net loss of California saw a net loss of 76,504 businesses in the same period.

These statistics show a strong linkage between the behavior of job creators and state tax policy – while a common sense linkage to most; you can be assured that California’s ruling liberal elite continue to scoff at such a notion.

Adding anecdotal flavor to the narrative, the Sacramento Bee ran a story last Sunday featuring the premise that California faces a brain drain if college graduates can’t find jobs. This suggests that policy makers who only focus on making college more affordable by boosting taxpayer support for higher education may inadvertently be spending money to educate other state’s future high income earners. It does little good for California to churn out college graduates who have to find work in Texas because California’s tax and regulatory policies discourage business creation.

California will not solve its current tax revenue challenges by levying even higher taxes on its most-productive residents – nothing is more mobile than a wealthy person and his money. But Democrats control all levers of California’s government and show little interest in reducing taxes or rolling back regulations.

California must enact tax and regulatory relief. If it fails to do so, its system of high taxes and even higher spending will drive a stake through the heart of the California dream.


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