You Thought the CA Economy Could Not Get Any Worse – Really?

Russ Steele

Governor Brown will have his tax initiative on the ballots and the Milken Institute reports that operating a business in California is 23 percent higher than the national average.

This is not lost on CA business. In 2011, 254 California companies moved all or some of their work and the associated jobs out of state, according to Irvine business consultant Joe Vranich,  who has been tracking these departures since 2009.

The pace is accelerating according to Vranich.  An average of 4.9 businesses left California each week of 2011, compared to 3.9 per week (202 total) in 2010 and one a week (51 total) in 2009.

With the implementation of AB-32’s Cap and Trade program this fall, business and home owner can expect electrical rates to jump as utility companies are forced to load up on renewable energy, some that cost 50 percent more than plentiful natural gas.  Details in the graphic below:

I have written about the PG&E program to institute the time of day rate increases that smart meters alls them to do HERE.  Those costs are not figured in the Cap and Trade rate increases out lined above. Running a energy intense business during the day in the summer will be very costly.

Governor Brown cannot collect taxes on business that have left the state, though some legislators are trying to figure out ways do that.  I predict that with the increase in energy costs and more business taxes, that the number of jobs leaving the state will continue to accelerate.  The CA economy will feel the impact. Yes, the economy is going to get worse.

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About Russ Steele
Freelance writer and climate change blogger. Russ spent twenty years in the Air Force as a navigator specializing in electronics warfare and digital systems. After his service he was employed for sixteen years as concept developer for TRW, an aerospace and automotive company, and then was CEO of a non-profit Internet provider for 18 months. Russ's articles have appeared in Comstock's Business, Capitol Journal, Trailer Life, Monitoring Times, and Idaho Magazine.

21 Responses to You Thought the CA Economy Could Not Get Any Worse – Really?

  1. stevefrisch says:

    Too bad you were not at the California Economic Summit to make your case instead of pontificating from the Cement Hill. What you are failing to calculate in your figures is the revenue from cap-and-trade that comes to Investor Owned Utilities will almost assuredly be redistributed back to ratepayers as part of the legislative process dealing with the distribution of these funds going on right now. Ironically, I am supporting such a bill, which I can be rest assured will never be either acknowledged nor appreciated by your couch caucus.

  2. stevefrisch says:

    By the way, if you read the LAO report on this issue you will find that the real risk here is that Utilities, who will have the easiest time complying because they can achieve the quickest and probably cheapest emissions savings, could reap a windfall from the sales of credits if action is not taken to direct those funds back to ratepayers. I hope our entire Sierra Nevada legislative delegation can get behind that effort.

  3. benjaminemery says:

    Russ,
    Just a couple questions. Do you think new business’s that will abide by the new law will fill the vacancy?
    If yes, I say good riddance to those business’s that cannot succeed on a level playing field.
    If no, are the reasons for their departure what you claim?

    I find it hard to believe if there is a market and profits to be made that a company would just pull up and move. If they are that pampered/ spoiled then maybe we need to be a bit stricter as a state at who deserves the privilege to incorporate in California. The power should be in the hands of the people not the businesses.

    • benjaminemery at 9:49 :

      “I say good riddance to those business’s that cannot succeed on a level playing field.”

      That is exactly the point, it is not a level playing field. CA has a more expensive cost of business which takes them off the lplaying field with companies in the same business located in lower cost states. To compete they need to more to lower cost states. Thus, they move to increase profits.

      “If no, are the reasons for their departure what you claim?”

      According to the relcoation experts the top reasons prompting business to exit California are: high taxes, excessive regulation, and an environment hostile to business.

      Now the State, under AB-32 cap and trade, is going to increase the cost of energy, and the cost of business. Why wait around to become uncomptitive.

  4. gjrebane says:

    Ahh yes, the California cap’n tax caper. Is anyone able to put down any numbers about ANY benefits to California’s economy that this atrocity will provide? What it is guaranteed to do is accelerate the Great Escape. And as a collateral effect it continues to expose the resident socialists claiming to be middle-of-the-roaders, especially those now dealing in carbon credits.

  5. California Company Hewlett-Packard Co. is considering cutting as many as 25,000 jobs, or 8 percent of its workforce, to reduce costs and help the company contend with ebbing demand for computers and services, people briefed on the plans said.

    The number to be cut includes 10,000 to 15,000 from Hewlett-Packard’s enterprise services group, which sells a range of information-technology services and has been beset by declining profitability, said these people, who asked not to be identified because the plans aren’t final and may change.

    Meg Whitman, chief executive officer since September, is seeking to reverse the growth slump that led to the ouster of her predecessor, Leo Apotheker. The company’s PC sales are dropping as consumers favor tablets, such as Apple Inc.’s iPad, and it has been slow to adapt to the shift toward cloud computing, away from the IT services Hewlett-Packard provides.

    More Here: http://www.chron.com/business/article/HP-may-lay-off-25-000-3566155.php

    Not all, but many of those job losses will be in California.

  6. stevefrisch says:

    I think it is interesting that you would post the HP story here rather than giving it a separate topic line. Your readers should know that cuts at HP have nothing to do with energy, energy costs, or any of Californias leadership on climate policy. What it does have to do with is two primary factors; sales of PC’s getting their butts kicked by tablets and other mobile devices and the fact that their entire enterprise services division, where I personally know employees who are my source of information for this, are being out-competed by lower cost and in some cases free business applications. Many medium sized businesses are discovering they can get the same services, like project management, accounts receivable/payable, supply chain management, and database integration from cheaper sources. This is, in effect, the normal ‘creative destruction’ of business.

    An even more interesting point is the fact that HP is sitting on more than $8 billion in cash reserves, and the cuts will only save them $1.2 billion dollars. In other words, HP is squarely in line with the activities of many American business who are sitting on $3 trillion in cash reserves, the highest percentage of cash reserves in the post WWII era. At the same time they are sitting on these reserves and firing employees they are saying they need tax breaks, special consideration on labor and environmental laws, and in some cases subidies, to operate effectively and grow. But cash reserves were only slightly more than $1 trillion in 2007, so how can they reasonably expect anyone to believe that they need these things to be competitive? How did they triple cash reserves during the greatest economic downturn since the Depression!

    http://www.forbes.com/sites/tjmccue/2012/05/17/hewlett-packard-should-retool-25000-jobs-not-cut-jobs/?feed=rss_home

    As the comment of the above commentary aptly points out, American business has an important and leading role to play in the nations economic recovery. They need to get off their assets and invest some of that booty in innovation.

    • benjaminemery says:

      Steve,
      It is called holding the American economy hostage. As the banks did in 2008 with the bailouts.

      I say end our free trade agreements and take these threats out of the quiver of Trans-national American based companies. Also start breaking up these companies.

    • Steven,

      Could those cheaper sources of “project management, accounts receivable/payable, supply chain management, and database integration” becoming from locations that have lower business overhead than HP a California company?

      I guess this is creative destruction also. According to the California Manufactures and Technology Association it is currently pretty gloomy in the manufacturing sector. California lost over 630,000 jobs in the last 10 years, more than the national average. California is among the worst in the last five years for new manufacturing facilities and expansions per capita. Why do you think that CA is loosing jobs? Creative destruction, or over regulation, higher energy cost, and union thuggery?

    • D. King says:

      “Your readers should know that cuts at HP have nothing to do with energy, energy costs, or any of Californias leadership on climate policy.”

      It’s all in the mix Steve.

  7. sean2829 says:

    A couple of comments. I see that HP has gotten a lot of talk here because they have $8 billion in cash but they also have a debt to equity ration of 0.78. That’s pretty high.

    Regarding the 25% added cost of doing business in CA. That’s probably not a big deal if all your customers and competitors are also in the state. The price of doing business will be higher for everyone, However, if you do a signficant amount of business outside the state or internationally, you’ll encounter price pressures from people with a lower cost structure. Since the market defines the price, out of state or international competitors will make more money if their costs are lower. At some point, they may choose to taka a lower margin forcing you to operate at a loss. At that point you need to find a way to cut or go out of business. The margins at most small companies are relatively small. A cost disadvantage this large (25%) is really serious.

  8. Arthur M. Day. says:

    Cap and Trade. Voodoo economics lives!

  9. Redman2 says:

    This is directed at stevefrisch:
    I own a small manufacturing business here that uses copious amounts of electricity. Since 90% of my customer base is scattered throughout the country I face a double whammy of high operating costs, and shipping costs. This leaves me at a competitive disadvantage with much of my customer base on the east coast and mid-west. To remain in business here (my family were pioneers, GGGrandfather was a ’49er) I’ve had to gradually move production to another state. AB 32s effect is this:

    I can move my entire operation to Washington State and save 65% on electric costs. The average bill now is running at about $.20 p/kwh here vs. $.07 in Washington. With the new smart meters, and peek usage rates in force, I will be put out of business if I remain here. It’s as simple as that.

    In addition, even though most state governments have had their fair share of revenue problems, Washington, unlike California tackled them, even with a Democrat Governor and legislature, cutting back without raising taxes excessively. Add in the facts of no Corporate or Individual State Income Tax there, and that most county governments (outside of Kings/Seattle) are run by sane people, and it’s a no-brainer.

    As a native Californian with roots going back to 1849, I will miss my home and the weather for sure – all thanks to people like you who support idiots in Sacramento.
    Enjoy the depression fella.

  10. Brad Croul says:

    So, do solar electric panels now make more sense than ever?

    California experienced a boom economy after WW2 – and our climate has something for everyone. Now, the state is overcrowded and things are getting expensive. Supply and demand?

  11. gjrebane says:

    Redman2 708pm – your comment is a sad but understandable one. Those of us who remain behind to fight the useless idiots destroying California will miss you.

    • Redman2 says:

      gjrebane, no one wants to give up and leave their home. AB32 was the final straw. There are so many problems here – 20% workman’s comp rate for mfg, county permits and delays for minor remodeling work, the banning or reformulating of common items used in my business like chemical cleaners and glues, the disability scam of “work related” injuries, and a general anti-business climate that is only getting worse.
      We looked at Nevada first, but decided even with Washington’s B & O Tax (a gross receipts tax) of .000484% for wholesalers, that on average it was a better choice given low electric rates and no income tax.
      Without going into the fine details, they also offered us an incentive package to relocate that is generous.
      We hear from others who have moved to expect an audit from the State Board of Equalization and/or Franchise Tax Board, after the move. Like a kick in the butt, huh?

  12. Readman2

    Thanks for giving us a first hand report. Having the data first hand gives the whole issue more credibility.

  13. RL Crabb says:

    There isn’t a day gone by that you don’t see an article like this in the mainstream press. I guess all these reporters are just too stupid to see the light. Right, Steve?
    http://www.thedailybeast.com/articles/2012/05/17/facebook-s-ipo-testifies-to-silicon-valley-s-power-but-does-little-for-other-californians.html

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