Published April 05, 2012
According to the 2011 Kauffman Index of Entrepreneurial Activity, California had the third highest rates of entrepreneurial activity in the country, with 470 new business owners per 100,000 adults in the state. This statistic is surprising as the state has struggled for the past three years with high unemployment. Also, for seven years in a row, ChiefExecutive.net has ranked California as the absolute worst U.S. state for business. But Californians are a hearty and creative bunch and their entrepreneurial spirit continues to beat the odds.
Is this state a good place for entrepreneurs?
The Small Business & Entrepreneurial Council ranked California the sixth least entrepreneur-friendly state in the country. The annual “Small Business Survival Index” looks at how taxes and major government-related costs affect investment entrepreneurship. Other factors that contributed to California’s low ranking included: High personal income, individual capital gains, corporate income and corporate capital gains taxes; high levels of state and local government spending and debt; imposing alternative minimum taxes; health insurance mandates; electric utility costs and workers’ comp costs.
Tax advantages in the state for new and existing business
According to the Tax Foundation, California’s tax burden is among the worst in the nation, with state and local taxes ranking sixth. However, California’s tax structure is beneficial to certain types of businesses. For instance, the State of California Franchise Tax Board offers motion picture and television production tax credits through the California Film Commission. They provide beneficial tax credits to independent filmmakers with projects between one million and ten million dollars produced by a company that is not publicly traded. Other business ventures that benefit California’s populace may be eligible for numerous tax credits, including enterprise zone credits, economic development area credits and targeted tax area credits.
Business climate and cost of living
Considering the five areas of taxation that affect business –corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes and taxes on property — the Tax Foundation’s 2011 State Business Tax Climate Index ranked California as having the 2nd least favorable tax climate for businesses in the nation. The Missouri Economic Research and Information Center listed California as having the fourth least affordable cost of living in the United States.
The Orange County Register reports that one in five Californian small-business owners do not expect to stay in business in California in the next three years. They quoted a small business owner’s frustration: “If I am (still in business in 2014), it will be in another state. The business and regulatory climate in CA is too oppressive.”
Despite the aforementioned tax disadvantages, the state’s well documented debt problem and small-business grievances, California’s economy is still the world’s eighth largest. California’s numerous high-profile cities offer many business markets. The United States Census Bureau reports that the state’s population is around 37,691,912. Inspired entrepreneurs continue to start small-businesses in California despite all of the state’s logistical setbacks and tax burdens.