Is California Strangling Its Golden Goose?

Citing a Bloomberg News article, Gov. Gavin Newsom crowed last month about the probability that California would soon pass Germany to become the world’s fourth largest economy.

“While critics often say California’s best days are behind us, reality proves otherwise — our economic growth and job gains continue to fuel the nation’s economy,” Newsom said.

Throughout his governorship, Newsom has been obsessed with bragging that California is a global leader in just about every human activity — and subtly suggesting that he’s the reason for its success.

It’s not surprising, therefore, that he didn’t mention another recent Bloomberg article, reporting that California is faltering in a major economic indicator it had long dominated — initial public offerings (IPOs) of stock by expanding corporations.

“Only nine companies headquartered in California went public during the first three quarters of 2022, compared with 81 that launched IPOs during the same period last year,” Bloomberg said in an analysis of filings. “Even more dramatically, California’s share of US IPO proceeds fell to 2% through Sept. 30, compared with 39% for 2021.”

Jay Ritter, a University of Florida finance professor, told Bloomberg that California’s meager IPO activity “is almost entirely” due to declines in valuation among Silicon Valley tech startups.

This is no small thing. The formation of new companies, followed by IPOs, has been a feature of the Silicon Valley-based technology sector for decades, creating untold billions of dollars in new wealth that filters through other sectors and generates immense amounts of income tax revenue for the state.

“We are already seeing an immediate effect,” Brian Uhler of the Legislative Analyst’s Office, told Bloomberg. “And it does appear to be significant.”

In September, California employers’ income tax withholding payments were down 5%, or $354 million, from a year ago with diminished IPO activity a driver of the decline, Uhler said.

During the first three months of the state budget’s fiscal year that began July 1, state revenues were nearly $5 billion below expectations, virtually all of it in income taxes.

The precipitous decline in IPO activity once again raises the question: Are California’s high taxes, high living and business costs and ever-tightening regulation strangling its golden goose?

A new report from Stanford University’s Hoover Institution provides evidence that the goose may be flying away.

The report by Joseph Vranich, whose company advises firms on relocation, and Lee E. Ohanian, a Hoover Institution senior fellow, says “the number of companies relocating their headquarters out of California in 2021 occurred at twice the rate of 2020. Our findings show that 352 companies moved their headquarters to other states just in the period from January 1, 2018, through December 31, 2021 … ”

Some of those relocations have been spectacular, such as McKesson, the nation’s ninth largest corporation, and Tesla, the leading maker of electric cars, from California to Texas.

The report covers only shifts of corporate headquarters, but there are other corporate moves, such as the Walt Disney’s relocation of 2,000 jobs from Los Angeles to Orlando, that are also negative indications. And corporate decisions not to locate in California or expand operations in the state are never publicly reported.
California may replace Germany on the global list of economies but that statistical exercise is far less important than the possibility that California’s economy has peaked.

Newsom is too smart not to know what the Bloomberg IPO article and the Hoover report imply. It may explain why he opposes Proposition 30, which would hike California’s marginal income tax rate to more than 15% and give investors another reason to shun the state.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. For more columns by Walters, go to calmatters.org/commentary.

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