In 2021, California business headquarters left the state at twice their rate in both 2020 and 2019, and at three times their rate in 2018. In the last three years, California lost eleven Fortune 1000 companies, whose exits negatively affect California’s economy today. But California also is risking its economic future as much smaller but rapidly growing unique businesses are leaving, taking their innovative ideas with them.
Why are companies leaving? Economics, plain and simple. California state and local economic policies have raised business costs to levels that are so high businesses are choosing to leave behind the many economic benefits of being in California and move to states with better business climates featuring much less regulation, much lower taxes, and lower living costs.
Our just-revised report is the most comprehensive and up-to-date documentation and analysis of business-headquarters relocations among California firms and their destinations. Prepared by combing through governmental reports, media stories, and other sources, our report shows that the rate of such relocations has more than doubled compared to recent years.
Our head count of headquarters departures is almost certainly far too low, since most business relocations are not reported by the media, and relatively few relocations require filing state compliance reports that would trigger documentation of the exit. According to professionals in the business relocation industry, our head count may be too low by a factor of five. Moreover, our calculation does not take into account California businesses that are retaining their headquarters in California but who are making large facility investments in other states, such as Apple and Wells Fargo, who are building large campuses in Texas, and Disney, who is doing the same in Florida.
California business exits are occurring across virtually all industries—including manufacturing, aerospace, financial services, real estate, chemicals, and health care—but perhaps most disturbing is the large number of high-technology businesses that are leaving. The tech hubs of Silicon Valley (Apple, Google, Facebook) and San Francisco (Salesforce, Uber, Airbnb) are among the most productive locations on the planet, filled with creative inventors, with venture capital funds in the billions of dollars competing to finance those innovators and bring their unique ideas to the marketplace.
California policy makers have always thought tech would stay, no matter what. But even tech firms are leaving the Golden State at an accelerating rate. Media headlines reported the losses of big-tech legacy firms including Hewlett-Packard Enterprises, Oracle, and Tesla, all to Texas. But California is also losing small, rapidly growing tech businesses at an increasing rate. Losing smaller businesses has remarkably negative implications for California’s economic future, because long-run economic growth requires new, transformative ideas that ultimately displace old ideas, and transformative ideas almost invariably are born in young companies.
At one time, Kodak, Litton Industries, and Polaroid were industry leaders and among the world’s most identifiable companies; today you would be lucky if you found anyone under the age of 30 who recognized any of those names. In 1979, General Motors employed more than 615,000 domestic workers; today, it employs about 53,000 workers. US Steel Corporation once employed nearly 340,000 workers; today, it employs about 24,000 workers.
The competitive world of business is one of “out with the old and in with the new,” and this process, which economists call “creative destruction,” seems to accelerate every year. Maxar Technologies is one of those new businesses that just might become transformational. Maxar, which left California for Colorado, is a rapidly growing organization specializing in radar and satellite technologies, providing 90 percent of the geospatial intelligence used by the US government for protecting our troops and other national security purposes.
Another key business departure is Envirotech Vehicles, which creates zero-emissions trucks, heavy equipment, and buses, and which left California for Arkansas. Demand for these vehicles will explode in the future as the United States rapidly moves toward replacing fossil fuel–powered vehicles with electric vehicles. Yet another California exit is AquaMetals, which left for Nevada. AquaMetals has developed a new, unique way of recycling strategic and rare metals, including lithium, which is used in smartphone batteries. They have created metal capture processes that are much more environmentally friendly than existing processes. The demand for lithium and other rare earth metals is expected to skyrocket in the coming years.
Our report identifies many more highly innovative and rapidly growing businesses that chose to leave California. Texas by far is the major state for relocations, but the relocations cited above show that businesses are moving to many states, all of which have lower business costs and better business climates than California.
While California has many economic advantages, it nevertheless is at or near the bottom in rankings of business climate and economic policies. The American Legislative Exchange Council, a nonpartisan research organization that produces economic policy evaluations of every state annually, ranks California 48th, behind only New Jersey and New York.
The Tax Foundation, a nonpartisan think tank focusing on state and national tax policies, ranks California 49thin its Business Tax Climate Index, far below Tennessee, Florida, Texas, and other states that are attracting California businesses. Annual surveys of business CEOs and small business owners invariably rank California 50th in terms of the quality of state business climates.
It is not just the business regulatory climate and high tax rates that are leading businesses to leave California. It is also the fact that California has remarkably high housing costs, which in turn drive up labor costs and, in some cases, lead workers to leave the state. California’s median home price of over $820,000 remains unaffordable to most households in the state. Since 2015, California has experienced a net outmigration of nearly 700,000 people. Losing this many people from the state would have seemed ludicrous not so long ago.
The state’s political leaders dismiss these statistics, noting that California remains the world’s fifth-largest economy. But there is no doubt that California has lost much of the competitive edge and uniqueness that it had in the past and that led its population to triple in size, growing from fewer than 10 million people at the end of World War II to nearly 30 million by 1990.
Our analysis reports exits through 2021, but the process of California businesses relocating to other states is continuing this year. Such businesses include Lucas Oil, a large producer of specialty petroleum products that is moving to Indianapolis, and Aviatrix, a technology company specializing in cloud networking and security, whose valuation doubled recently to $2 billion. In discussing his company’s relocation to the Dallas area, Aviatrix CEO Steve Mullaney stated that he plans on hiring many young people but noted that young people don’t want to live in Silicon Valley anymore, because they cannot afford to buy a home, particularly one in a high-performing school district.
While California has many natural advantages, its state and local economic policies have created a business climate that is no longer competitive with that of many other states. Policies have driven business and housing costs so high that companies and people are leaving the state for more affordable, less regulated, and less taxed locations. This process will continue until the state’s political leaders make very different policy choices that create a different future for California—one that honors its remarkable past.