California's economic crisis - businesses are leaving the state - includes related articles - Cover Story

Nation's Business, July, 1993 by John S. DeMott

Custom Stamping Inc.'s $2 million factory in the Los Angeles County town of Covina has oak-paneled front offices and a squeaky-clean shop floor. The company's machinery hums, turning out millions of tiny precision metal parts for the computer and telecommunications industries. Annual sales are $15 million.

But Custom Stamping, most of its 68 workers, and 43 punch presses will soon leave California for a new plant near Carson City, Nev. The company expects that its costs there will be about half what they are in California.

Custom Stamping is hardly alone in its disenchantment with the state that has been its home for 23 years: A number of companies are either moving to or expanding in other states because of what many executives describe as excessive regulations, high taxes, too much crime, and an oppressive workers' compensation system that Gov. Pete Wilson calls "a national disgrace."

The loss of these tax-paying and job-providing companies in the nation's most populous state is adding to California's already formidable problems--the national recession, swelling immigration and its heavy demands on state agencies, defense and aerospace downsizing, a prolonged drought's lingering impact on the agriculture industry, scheduled military base closings, and vast construction cutbacks.

Because of California's size, political clout, and tradition as a national trendsetter, the impact of what business generally views as excessive taxation and regulation on companies is being watched closely by businesses and governments in other states for the lessons that the current situation in California offers to other parts of the country.

Business disenchantment with taxes and regulation is not unique to California of course. New York, Connecticut, and other states are struggling with similar difficulties. But the concept of California up against such serious problems represents a tremendous change in the image that Americans generally have long held 1950. Although New York and Pennsylvania had the largest populations well into the 20th century, California now has more people than those two states together.

California's 52-member U.S. House delegation is equal to the combined delegations of New York and Pennsylvania and accounts for 12 percent of the entire House membership. California's 54 electeral votes are 20 percent of the total needed to elect a president.

California's role as a trendsetter extends from fashions and fads to such significant initiatives as the tax revolution of the early 1970s, widely viewed as the beginning of the political shift that eventually brought Ronald Reagan to the White House and transformed American politics. The state had been viewed as a land of economic promise from the Gold Rush through the emergence of Silicon Valley as the mother lode of American technology.

Despite its growth and drastically expanded political presence, California has been experiencing problems that not only affect individual businesses but also have triggered fiscal crises in the state government. At one point last year, the state was paying employees and vendors with vouchers in lieu of cash while Gov. Wilson and the legislature debated ways to close a multibillion-dollar budget gap. The solution put additional tax pressures on businesses, which have also been forced to cope with regulations that go further than those of many other states.

The Economic Development Corporation of Los Angeles County, a privately funded organization that helps small businesses deal with workers' compensation and other regulatory problems, says nearly 400 businesses and 66,000 jobs have left Southern California since 1990.

In a recent survey by Hankin & Co., a Los Angeles consulting firm, 10 percent of the 90 Southern California companies responding said they "definitely" plan to move some or all operations from California within a year, and an additional 13 percent said they would "probably" do so.

The picture is much the same in Silicon Valley and the San Francisco area. Richard Pimentel, managing partner in the accounting firm of BDO Seidman in San Francisco, says: "Any expansion by my clients is being done outside California. It just costs too much money to do business here."

Kirk West, president of the California Chamber of Commerce, recognizes the problems of recent years-he has a list of corrective actions he says the legislature should take to help the economy--but he rejects allegations that the state has gone into permanent decline. "There is an excellent chance for a turnaround," he says.

A basic problem, West says, is what one state official has termed a growing imbalance between "taxpayers and tax receivers." The business-backed reforms to create jobs will rectify that situation, he adds.

The need for greater employment opportunities was cited frequently in the wake of the riots in south-central Los] Angeles last year, which wiped out businesses and jobs that the city and state could ill afford to lose. Many analysts argued that high unemployment contributed to the riots, whose immediate cause was a not-guilty verdict in the first trial in the police beating of Rodney King.