Elon Musk might join the sizable club of folks moving out of California, by taking Tesla from California to Texas. On Saturday afternoon, Musk tweeted that he will move the company’s factory from Alameda County, CA, to either Texas, Nevada, or both. Later that night, Tesla filed a lawsuit against the county for its continued enforcement of factory shutdown orders due to coronavirus.
Tesla currently runs that factory in Fremont, along with its corporate headquarters in Palo Alto and design studio in Hawthorne, CA, receiving hundreds of millions in favorable state tax breaks. To Musk, however, those breaks don’t offset California’s anti-business climate, highlighted by an Alameda County shelter-in-place order that will last through May 31, even as other cities and states reopen.
If Musk goes through with his threat, he will join a host of other businesses and people leaving the state, and he will be doing it for the same reasons: California’s illiberal policy paradigm. It’s no surprise he would go to one of the Sunbelt states in search of more economic freedom.
Every year, Chief Executive Magazine surveys CEOs across the country to list their best and worst states for doing business. The winners are generally conservative Sunbelt ones—Florida, Tennessee, the Carolinas, and Texas, which has ranked #1 in each of the survey’s 15 years.
The losers are generally “progressive” northern states—New York, Connecticut, Massachusetts, Illinois, etc., but California ranks the lowest, placing last for 5 straight years.
Taxes are a big reason. While 9 states have no income tax, California has by far the highest at 13.3%. Its overall tax burden is America’s 6th-highest, according to the Tax Foundation.
Another factor is the regulations, namely for labor. California has a progressive minimum wage, powerful protectionist unions, strict occupational licensing, and poor consumer freedom-of-choice rankings. Governor Gavin Newsom brought the state to a new low last year when he signed a bill entitled California Assembly Bill 5 (AB5), which outlaws many types of independent contractor work.
A 3rd factor, which also fits the “regulation” category, are land-use laws that prevent housing from getting built. The Wharton Residential Land Use Regulatory Index mirrors similar surveys in ranking California among the most regulated states in the Union. This means housing is more expensive, companies must pay their workers more, and much of the potential workforce leaves, shrinking the labor pool. But more on that later.
The result is that over 1,000 businesses are estimated to leave California each year, with Texas being the biggest recipient state from California for 12 straight years.
California is by far the most populous state, with 39.5 million residents. It is fitting enough: a place with moderate weather, sparkling beaches, and big cities should attract lots of people.
Befuddlingly, California has recently trailed demographic growth projections. Between 2010-2019, California added 2.3 million people; Florida and Texas, which are frequently compared to California, added 2.7 and 3.9 million, respectively, and their growth rates were over double California’s. In the most recent 2018-19 findings, more people left the state than moved in; the only thing that ensured (mild) population growth was birthrate. Many existing Californians who are surveyed also say they want to leave, with one survey recording this desire for 53% of residents and 63% of Millennials.
The most common destinations are nearby states, helping explain why Idaho, Nevada, Utah, and Arizona are among the fastest-growing. California is also, predictably, the largest exporter of people to Texas of any U.S. state.
Just as there’s no fundamental reason why businesses should have to leave California, there’s no reason people should either. It’s about policy.
California has a large regulatory apparatus to prevent new home construction, including zoning, greenfield preservation, environmental review, and more. This has caused California to have an estimated home shortage of 3 to 4-million-units. It boasts the 2nd-lowest number of housing units per capita of any state and median prices over double the U.S. median. That is why those survey respondents cite housing costs as their biggest reason for leaving.
The way given U.S. cities or states are governed is not reflected solely by their formal policies, such as those mentioned above. It also boils down to the thousands of judgment calls officials are forced to make, based on whatever ingrained local political culture and constituent expectations exist. This means states often react very differently to the same hot new issue, and coronavirus is no exception.
Many conservative Sunbelt states are reopening, not because they’re unaware of the health risks, but because they think other factors are more important, like personal rights, economic freedom, and financial solvency for the workers and businesses that comprise their communities.
A state like California, and the cities therein, will inevitably have a different approach. They have, as is so often the case, prioritized government power over personal liberty. It is no surprise, then, that when needing to choose between the two during coronavirus, they value the former above the latter, enforcing blunt top-down tools like factory shutdowns and quarantines. The dramatic economic fallout that could result won’t matter to California’s body politic any more than the economic fallout from high taxes and housing shortages do. It is simply the California way of doing things.
Tesla has become the latest victim of that mindset and could become the state’s new high-profile refugee, joining millions of other people and businesses who already left.
Editors Note: After a multi-day stand-off, California officials have made a landmark exception for the Tesla factory in question to re-open, according to a CNN Business report on Wednesday.
[This article was originally published by Independent Institute. Image credit by JD Lasica from Pleasanton, CA]
Scott Beyer owns and manages Market Urbanism Report. He is a traveling journalist who writes regular columns for Governing Magazine and the Independent Institute.
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