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CALIFORNIA: IDEAL FOR BUSINESS INCORPORATION DESPITE CRITICS’ OPINIONS

August 10, 2016

According to critics, California is one of America’s worst states for business incorporation due to its economy, tax system, and highly regulated environment. Just this past month, in the CNBC’s 2016 ranking of all 50 states according to “60 measures of competitiveness,” California was placed at No. 32, and in his “Rich States, Poor States” ranking for the conservative, pro-business American Legislative Exchange Council (ALEC), economist Arthur Laffer places California at a dismal 46th in economic outlook for 2016. Furthermore, in 2015, Forbes ranked California’s business costs as being the fifth highest in the U.S. and its regulatory environment the eighth most burdensome, and the Tax Foundation noted California’s tax structure as being the third worst for business in the nation. And yet, despite these rankings, California is and will continue to be a state ideal for business incorporation. Why?

Rankings, such as those previously stated, fail to measure that which makes a state economically successful – rather they judge the states’ adherence to select policy variables. Additionally, research has shown that “business climate” rankings, which typically look at a state’s corporate taxes and regulatory environment, have less to do with overall economic performance than factors such as favorable weather, geography, population, or being home to a diverse mix of industries – all of which help to explain why California has the sixth largest economy in the world.

To throw out a few numbers: state and federal statistics released as recently as July 2016 note that California gained 40,300 jobs in June and 461,000 over the course of the year, which turns out to be greater than the second and third most populated states (Florida and Texas) combined. With regards to investment numbers, California companies in the S&P 500 delivered returns of 134%, 52% greater than the next challenger (Florida). Also, in accordance with the congressional Joint Economic Committee, California leads the nation in gross domestic product growth, which grew by 4.2% in 2015 — more than twice the national rate. Put simply, the high taxes and expansive regulatory environment that critics continue to cite are proving to be no obstacle to business and investment.

Furthermore, the state’s preparation for and confrontation of 21st century challenges such as urbanization, climate change, and globalization is also a major contributor to why California is ideal for business incorporation. For example, among the 127 North American companies in the Bloomberg Americas Clean Energy Index, 26 are based in California, with average revenue growth of 11% (2% more than the average for the rest of the sector across the continent). Just as rising stars continue to make their way to Hollywood – the hub of the entertainment industry – entrepreneurs looking to make a substantial impact to better these challenges are also making their way to California.

Ultimately, critics are failing to recognize factors with a greater tangible contribution to overall economic performance. Statistics show that California’s tax system and highly regulated environment that critics cite as a barrier actually place little to no burden on business and investment. Overall, critics are blinding themselves to the reasons California is and will continue to be a state ideal for business incorporation.

By Austin L. Jackson, Law Clerk

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