Hell hath no fury: scorned, California businesses weigh their alternatives.

No matter how you add it up, the numbers tell the tale. According to the California Chamber of Commerce, California's corporate tax burden is almost 40 percent above the national average; electricity costs are nearly double the national average--and are the highest in the contiguous United States; and California's overall business costs are 32 percent above the national average.

In short, the Golden State is looking a bit tarnished from a business perspective.

And businesses are responding by leaving California at an alarming rate. Nearly one-fifth of California's businesses said they are planning to expand or relocate out of state to relieve cost pressures, according to a recent Chamber of Commerce poll of 400 business.

High workers' compensation insurance, a high minimum wage and a taxing family medical leave act are just some of the reasons that many businesses are eyeing greener pastures in states such as Texas, Nevada, Colorado and Washington.

But it's not only businesses packing their bags. From 1995 to 2000, 760,000 people left California for other states--the second-most only to New York--marking the first time that more people left the state than arrived from other states.

And the state's recently passed budget only looks to further the perception that California is a business-unfriendly state.

"This year's budget was really a patchwork scenario," says Kathleen Wright, CPA, JD, a professor of accounting at California State University, Hayward. "California tried to, as it did last year, patch over its deficit without really addressing the much bigger problem. Government-imposed fees on doing business have led to this exodus. Taxes are high, but fees are the killer."

BUDGET CONSTRAINTS

The state's budget allowed a significant business tax credit to lapse and cut funding for some key economic development programs, while raiding other monies that would benefit business.

And despite the amputations, when Sacramento gets set to vote on next year's budget, the state will still have a deficit in excess of $8 billion.

"I saw very little in this budget that would help California's economy," says Tom Campbell, dean of the University of California, Berkeley's Haas School of Business. "I felt that the rollover of debt was disturbing. My worry is that, as the national recovery begins to build, we will lag behind.

"As firms rehire, they will rehire in Texas, for instance, and not in California, and that's directly related to the costs that we impose by our regulations and laws" related to workers' comp, high corporate tax burden and high energy costs.

California's business climate has become increasingly challenging, and in a sign of the times, Standard & Poor's recently downgraded California bonds to triple-B rating, the worst of any state in the nation and just two notches above junk bonds.

THE MIC AND BEYOND

While several business incentive program cutbacks were included in the budget, it was what the budget didn't include that may impact business the most.

"The most significant tax event in our budget is certainly the manufacturer's investment credit," says Wright, who also teaches at San Jose State University.

The manufacturer's investment credit (MIC), a 6-percent tax incentive that allowed manufacturers to offset the cost of buying new equipment, was not renewed in this year's budget because certain job-growth conditions were not met.

When the credit was enacted in 1994, a clause stated that manufacturing jobs in the state must increase by 100,000 over 1994 levels for all years after 2001. As of Jan. 1, 2003, that requirement had not been met. Manufacturing jobs only climbed by 50,000 in that time.

But when you consider that California lost 299,500 manufacturing jobs since Jan. 1, 2001, those 50,000 new jobs aren't so bad, says Jack Stewart, president of the California Manufacturers and Technology Association.

"If all other things had been equal over the nine years, that may have been the test," Stewart says. "But workers' comp costs have more than doubled, energy costs for large users have doubled and the loss of this tax credit--at a time when the economy is in the toilet--just makes it more difficult for companies to locate or invest here."

The MIC allows a wide range of businesses $350 million to $450 million in tax write-offs each year, the CMTA estimates.

"There's no question that with the loss of the MIC, more companies will consider leaving California," Stewart says.

In addition, the Technology, Trade and Commerce Agency--the state's chief economic development agency--has lost its funding and will see its offices in cities such as London, Tokyo and Frankfurt close. And funding for local government redevelopment agencies, which work to attract businesses to their cities, lost $135 million through the budget.

On top of that, another state fund, the Employment Training Panel, suffered some cuts. When a company has to train or retrain an employee, the panel can reimburse part of the training costs. The panel is funded by employers, with a one-tenth of 1 percent surcharge on the unemployment tax.

"About $80 million a year goes into that panel," Stewart says. "And the Legislature took about $35 million off of that."

Stewart also laments budget cuts to infrastructure development, money targeted at roads and water projects raised through bonds. While not directly affecting business, the cuts look to have "an overall impact on the business climate here," he says.

WORKERS' COMP, MEDI-CAL AND FAMILY LEAVE

Patricia Cochran, CFO of Vision Service Plan, the nation's largest eye-care insurer, characterizes California's business climate as "challenging."

"Our workers' compensation rates went up 27 percent last year, and 29 percent the year before," Cochran says. "[Workers' compensation] is a serious issue for us. Previously, the rate increases were less than 10 percent a year."

Cochran, a CPA, says the company has looked at self-insuring as an alternative to rising workers' comp insurance. She adds that while weighing that alternative, the company has focused on pre-emptive strikes, making sure that VSP offices have all the latest ergonomics, thereby reducing workers' compensation claims.

"You hear about small businesses actually going out of business over workers' comp," she says. "For our business, those kinds of increases are well beyond any other cost category."

In addition, the state's budget included cuts to Medi-Cal (California's version of the federal Medicaid program) another potential barrier for the Sacramento-based VSP.

"We'll have to decrease payments to our doctors, and the payments we receive for vision claims that we pass on to doctors will decrease," she says, which could limit a patient's access to certain doctor.

"Some doctors may drop out of the network because they can't handle the decrease. You never know what the breaking point is," Cochran says.

In addition to high workers' compensation insurance, California's family medical leave policy is the only one in the country that requires employers to pay a portion of the employee's salary when on leave. "It certainly is a concern," Cochran says. "It certainly does drive the cost up, but it appears to be a necessary part of doing business in California."

GETTING BACK ON TRACK

Berkeley's Campbell offers a checklist for getting California back on its feet. And surprisingly, the first step doesn't involve any complicated economic theory.

"A lot of it has to do with image, we can't ignore that," he says. "There's an overwhelming perception that the Legislature exists to add to the cost of doing business. "The governor ought to say look, California is open for business, and really emphasize it."

Campbell's second proposal would be to review state regulations that overlap or duplicate federal regulations, and determine whether the state needs to have a different or more burdensome regulation than the federal.

"Third, I'd propose that every regulation automatically sunset in five years, thus requiring the state to revisit whether the regulation is serving its intended goal." Campbell says.

The fourth proposal would be litigation reform. If California was to announce that it would make the losing party in a lawsuit pay the cost of the lawsuit, then "we'll have businesses turning around at the border and coming back," he says. "Company after company will tell you that they get advice that the litigation environment in California is the least friendly."

And the last proposal would be a sort of streamlined economic development agency. "Suppose we create a group that says, 'You want to expand in California? You want to come to California? Here are five people in the governor's office who will walk you through every process.' What a statement that would be."

Best of all, none of these proposals would cost California anything. "I'm talking about changing the perceived climate with some rather dramatic announcements," Campbell says.

SPENDING CAPS

Some feel that part of California's economic plight can be attributed to a structural spending imbalance.

California's tax base is heavily dependent on personal income tax, a volatile segment that reflects the ups and downs of the stock market and federal economic regulation. And state spending reacts to that volatility, perhaps too quickly.

A case in point: During the boom of the late 1990s, there was demand for people to sell stocks or exercise options. But the federal capital gains rate was a bit high at the time, and most thought it prudent to wait until the rate had been lowered

"The minute the fed lowered the rate, all this money moved. When all this money started flowing in, California spent and spent," Wright says. "So when all that pent-up demand was exhausted, and collections plummeted, all these programs were in place that now needed to be funded.

"This overabundant generosity, when you don't have the money to play with, is misplaced to say the least."

One possible remedy lays in the idea of spending caps. Assemblyman John Campbell (R-Irvine) has introduced a constitutional amendment aimed at stabilizing the growth in state spending. The proposal, ACA 6, would establish a state reserve fund to soften the impact of revenue shortages in the lean times.

However, ACA 6 has been stalled in the Legislature. "We are investigating the possibility of taking it to a voter initiative," the CPA-legislator says. "It could happen for November 2004."

The assemblyman likens the proposal to a 401(k) program. "People know they have to save for retirement, but many don't have the discipline to do it, so they have an external discipline called a 401(k)," he says. "This proposal would apply that same external discipline."

The proposal also looks to reform some of the state's accounting practices. Under the state's accounting method for spending, if California borrows money over five years to make current expenditures, "that's actually shown as a reduction in spending," says John Campbell.

"It's that kind of loophole that has enabled the Legislature to spend us into near insolvency."

Berkeley's Tom Campbell also believes that spending caps would be a boon. "Five years ago, revenue had gone up 25 percent, but state expenditures went up 37 percent," he says. "Why? If we start with the premise that you shouldn't spend more than you bring in, you're not going to shock anybody."

A TALE OF TWO RECESSIONS

During the last recession of the early 90s, then-Gov. Pete Wilson appointed "red teams," groups of high-level government officials charged with slashing red tape to attract and retain businesses.

At that time, Peter Ueberroth was commissioned by the governor to study the economic climate of California, as well as its competitiveness with other states. "The report characterized California as a well-honed job-killing machine," Tom Campbell says.

"There was a real sense that California had to do something to rekindle its economy," Stewart says of the 1990s. "It was a real bipartisan effort between the Legislature and the administration. What we're seeing coming out of this recession is exactly the opposite. The signal we're getting out of Sacramento is, 'We just don't give a damn about the business climate.'"

GOING MY WAY?

Other state economic development agencies have begun to target California businesses. Nevada and Idaho, among others, have recently launched ad campaigns that mock California's workers' comp system, utility rates and medical leave act.

In fact, the Nevada Development Authority recently said that it has attracted 20 California businesses in the last year, representing about 1,000 jobs.

"There are a lot of businesses that have moved their operations out of state and have kept their headquarters or some services here," says Evelyn Haydock, CPA, director of client services at San Francisco-based Payroll Resource Group Inc., and chair of San Francisco's Members in Industry Committee.

Texas also ranks as a hot exodus spot. To illustrate Haydock's point, both Intel Corp. and Cisco Systems Inc. have expanded their operations in Texas rather than in California. Hewlett-Packard Co., when it merged with Compaq Computer Corp., had a high-end server manufacturing facilities in Roseville, (near Sacramento) and in Texas. The company closed its facility in California and about 500 jobs moved to Texas.

The tale is all-too common. Regarding the elimination of the MIC, Wright believes technology should be targeted over manufacturing for business incentives. "We should focus our concerns on technology, because technology is beginning to find it can go just about anywhere," she says. "And they are the folks that are here in large numbers."

What's more, proposals on the legislative table, such as mandatory health insurance coverage for every full-time worker in the state, may turn California's business climate from chilly to uninhabitable.

Some see the recall effort as an opportunity to revisit these business climate issues. But turnover doesn't always spell a turnaround.

When the economy went south a few years ago, the rumblings regarding California's business climate grew to a roar and the business climate problems become more evident.

"During the good times, adding to the cost of doing business was not as visible, because margins and earnings were up," Tom Campbell says. "It's only in the down time that we recognize the one-way ratchet of adding to the cost of doing business." [CPA]

Jerry Ascierto is CalCPa's associate editor. He can be reached at [e-mail].