California’s Problems Illustrate the Complexity of Corporate Site Selection Decisions

Companies have been fleeing California’s high tax and minimum wage environment for years despite the deep talent pool of workers. The state’s myriad problems, including the thousands of homeowners currently at risk from wildfires, illustrate the delicate balance companies must traverse when deciding where to relocate their call centers, manufacturing plants, distribution centers, software development or headquarters operations.

The Golden State ranked 49^th overall of 50 states on a recent state business tax climate index (ahead of only New Jersey), and its minimum wage law, which increases the state’s minimum wage to $15 an hour by 2022, has drawn concern among businesses such as call centers, which are impacted by wage inflation. Site Selection Group estimates that California’s minimum wage law could put over half a million call center, distribution and manufacturing jobs at risk.

California’s problems illustrate the importance of evaluating a myriad of factors when considering where to expand or relocate your software development, call center, manufacturing plant, distribution center, or corporate headquarters operation.

To help companies evaluate their options, we look at a variety of site selection factors including labor availability, labor costs, logistics, business climate, accessibility, economic incentives, and other factors specific to a company’s location needs. We have found the following business drivers to be common issues that emerge when companies are relocating from California.

1. Labor cost. Minimum wage laws continue to be a hot topic across the U.S. due to the increased cost of living, tight labor conditions and mounting political pressure. Minimum wages in many states have increased in recent years creating challenges for companies trying to control costs and plan for new sites. These wage laws can impact labor availability and labor costs for employers paying slightly above minimum wage such as call centers and distribution centers. In addition, the current demand for employees as the economy begins to strengthen now that the coronavirus is better understood, is also driving up wages. Labor costs are something a company will want to carefully monitor when considering locations.Minimum wage legislation will continue to be a factor that companies will want to carefully monitor.
2. Business climate. A variety of organizations and websites publish information about state business climates. The Tax Foundation’s “State Business Tax Climate Index,” as an example, enables business leaders to see how states’ tax systems compare. The top five states this year for the best state business tax climates are Wyoming, South Dakota, Alaska, Florida and Montana. Texas, which has been credited with attracting the highest number of high-profile California companies, among them Tesla and Toyota, ranked 11^th. California ranked higher, 33^rd, in CNBC’s “America’s Top States for Business” an index that crunched 85 metrics for competitiveness and put Virginia, North Carolina, Utah, Texas and Tennessee in the top five. Companies will continue to relocate to places like Texas, Arizona and Georgia, from states such as California, New York and Illinois as they hunt for more favorable business climates.
   

   		TEXAS	CALIFORNIA
   State Business Tax Climate Index1	Overall State Rank	11	49
   Corporate Income Tax	Income Tax Imposed	No	Yes
   	Franchise Tax Imposed	Yes, Margin Tax	Yes
   	Starting Point for Taxable Income	Federal Gross Income	Federal Taxable Income
   	Apportionment	Single Sales Factor	Single Sales Factor
   			Throwback Rule
   	Tax Rate	0.75% of taxable margin	8.84%
   Individual Income Tax	Tax Rate	N/A	Graduated Rate: 1.0% to 13.3%
   Sales Tax	State Tax Rate	6.25%	7.25%
   	Average Local rate	1.94%	1.43%
   	Manufacturing Machinery	Exempt	Partial Exemption
   Property Tax	Inventory	Yes	No
   	Personal	Yes	Yes
   	Real	Yes	Yes
   	Average Tax Rate	2.40%	1%
   State Unemployment Insurance Tax Rates	Taxable Wage Base	$9,000	$7,000
   	Minimum Rate	0.15%	1.50%
   	Maximum Rate	6.36%	6.20%

   
   

   1. Source: Tax Foundation https://taxfoundation.org/publications/state-business-tax-climate-index/

   2. Information above may vary based on legal entity (i.e. S Corp. C Corp. versus LLC, etc.)

3. Real estate costs. The advent of increased remote work as a result of the coronavirus pandemic is having an impact on real estate costs for companies looking to relocate and expand in a new location. Those implementing a more permanent hybrid or remote model, may discover they’ll need less real estate in the future. If you are a tenant or user of office space and need space, it’s a great time to explore options as the market has shifted from a landlord-favored market to a tenant’s market.
4. Cost of living. California, we all know, is an expensive place to live. The Midwest, in contrast, is more affordable. Where to locate in terms of cost of living is certainly something that companies will want to consider. Cost of living takes into account basic living expenses such as housing, food and healthcare and can impact the quality of life enjoyed by a company’s employees and leadership. Gateway cities such as New York City, Los Angeles and San Francisco, have high costs of living, but they also have cachet that other cities may lack. It’s important to examine your business address in terms of the cost for you and your employees in contrast with the prestige of certain cities, and to ultimately focus on what is most important to your future business success. In terms of cost of living, Hawaii, the District of Columbia and California have among the highest costs, while Mississippi, Arkansas and Oklahoma have the lowest, according to World Population Review.

States attracting California’s businesses

Texas first gained attention several years ago for its advertising campaigns in California encouraging businesses there to relocate to the Lone Star State. While it has excelled at attracting California companies, it isn’t the only state that has benefited from the California exodus.

Elon Musk’s decision to open a Tesla plant near Austin, Texas, last year brought renewed attention to California’s high tax rates, onerous business climate, and high cost of living.

The high-profile exoduses from California to Texas include:

• Charles Schwab, which relocated its headquarters from San Francisco to Dallas-Fort Worth
• Infrastructure consultant AECOM, which just announced it would to relocate its global headquarters to Dallas effective Oct. 1
• Healthcare giant McKesson Corp., which moved to DFW from San Francisco
• The world's largest database company, Oracle, which moved its headquarters from Silicon Valley to Austin
• Tesla will expand in Texas with an electric car manufacturing plant near Austin, and Musk, who had issues with California’s COVID-19 protocols, has already taken up residence in the state.
• Digital Realty, a provider of data center, colocation and interconnection solutions, plans to relocate its corporate headquarters from San Francisco to Austin.
• Core-Mark left San Francisco for Dallas
• And, in one of the biggest moves in recent years, Toyota Motor North America, relocated its Torrance, California, headquarters and 3,000 jobs to Plano in 2017.

Conclusions

It’s important to carefully study metrics that will have a major impact on your operations. For most, that includes labor costs, business climate, real estate and the cost of living, among others. Looking at these metrics is only one part of establishing a balanced and substantive assessment of a market. Site Selection Group works with its clients to develop a balanced analysis utilizing proven site selection data and our market intelligence to identify the optimal markets for relocations and expansions.