Sayonara, California

Some people say California is one day going to break off and sink into the Pacific. In the literal sense, this is a myth. Figuratively speaking, however, it is an apt metaphor for the state's current situation.

The state is known for its high taxes and myriad regulations. Recently, that reputation got driven home even harder. A flurry of legislation affecting businesses enacts expensive new health benefits, imposes tougher regulations, and makes it easier for workers to sue companies.

The inevitable result? Businesses will flee the state even faster. Fewer businesses will want to move there. And entrepreneurs won't want to set up shop there.

California's economy is larger than that of most countries of the world. But California is only a state, not a country. That makes it unable to get away with what countries can get away with. When the latter enact far-reaching social welfare measures, businesses grumble, but stay put; it is exceedingly difficult to relocate to another country. But if a US state acts the same way, companies can move to another state with relative ease.

People and businesses vote with their feet – they pack up and move out. Given this reality, taxes and regulations have to be treated more delicately at the state level than at the national level.

California's recently passed social welfare measures include paid family leave, and increased premiums for workers' compensation and unemployment insurance. The statute of limitations for personal injury claims has also been extended.

The state's business-unfriendliness is borne out in recent surveys conducted before most of these laws were passed. Of all the states in the union, California's business climate ranks dead last. This is according to a survey of 287 senior-level executives, conducted by Development Counsellors International. In the Small Business Survival Committee's 2002 index, California ranks a dismal 46 out of 50.

The Census Bureau evidently does not keep figures on the rate of business out-migration, but one can get an idea by looking at net out-migration figures of US-born people. More than 2 million left California during the 1990s, primarily resettling in neighboring states. Anecdotal evidence indicates that businesses left in droves in the early 1990s, then the pace tapered off. With the recent "job killer bills" (www.jobkillers.org) and shaky economy, the pace may likely pick up again.

Of course, that's just fine with some Californians who think profit is evil. As far as they're concerned, the fewer businesses in the state, the better. Other more moderate Californians understand the benefits of having businesses around, but think their state's quality of life will be enhanced by more generous social welfare benefits.

But what generally happens when businesses flee an area and/or fewer of them get established? The quality of life declines. There are fewer jobs and incomes decrease. The environment may suffer, as there is less money available to clean it up. The crime rate rises.

California won't go downhill overnight. The perverse effects of excessive taxation and regulation typically manifest themselves over years. And other things are keeping people and businesses in the state, e.g. a large market, good universities, beautiful landscapes, good weather, but more and more people are deciding such attractions just aren't worth it.

Other states should take heed from California's experience. It shows what happens when a US state transforms itself into a welfare state.

Patrick Chisholm is a former managing editor at a financial publishing company. He has a master's degree in international affairs/international economics from American University.