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CALIFORNIA BUSINESS CLIMATE OVERVIEW
From the California Investment Guide 2016
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The Purpose-Driven State

California gets intentional about its approach to economic development.

CALIFORNIA BUSINESS CLIMATE OVERVIEW
California State Capitol building in Sacramento
All photos by Heather Overman

by RON STARNER
A
Tesla cars charging in their designated parking spaces at the Tesla headquarters in Palo Alto.
Tesla cars charging in their designated parking spaces at the Tesla headquarters in Palo Alto.
fter years of watching governor after governor swoop into California and poach some of the state’s best companies away, Gov. Jerry Brown is getting intentional about the way he fights back.

Brown may not exactly rekindle memories of Clint Eastwood’s Dirty Harry character. But the governor does have one thing in common with the fictional cop: This time, he’s carrying a bigger weapon than the other guys.

No, it’s not a .44 Magnum. It’s called California Competes. The program is hailed by many as California’s most ambitious and aggressive economic development initiative in the state’s 165-year history.

The California Competes Tax Credit is an income tax credit available to qualifying businesses that want to come to California or stay and expand in the state. Tax credit agreements are negotiated by the Governor’s Office of Business and Economic Development (GO-Biz) and approved by a statutorily created California Competes Tax Credit Committee consisting of the state treasurer, the director of finance, the director of GO-Biz, and one appointee each by the Speaker of the Assembly and the Senate Rules Committee.

The new state incentive targets “high-value” businesses that are growing in California. The goal of the program is to attract and retain employers in industries with high economic multipliers and high wages. The tax credit is awarded through a two-phase competitive process and is capped at $200 million for each of the next two fiscal years. Any business may apply, and 25 percent of the available funds are set aside to help small businesses grow.

California Competes and two other initiatives replace the state’s underperforming Enterprise Zone program. A partial sales tax exemption for manufacturing equipment and the New Employment Credit are the other two. The latter applies to qualifying firms that hire new workers in designated census tracts or economic development areas.

One of the high-value sectors the state hopes to grow is its emerging green and sustainable economy. According to a recent report by the Los Angeles-based Kosmont Companies, “the march to an economy focused on industrial and commercial processes that reduce energy consumption and achieve significant carbon footprint reduction is on in California.” The report goes on to state that “the state is on the brink of adopting more green legislation that would accelerate the efforts of AB 32, SB 375 and SB 535 by requiring that the state generate 50 percent of its electricity from renewable sources, double energy efficiency in older buildings, and reduce gasoline usage by half.”

The conclusion of the Kosmont report is succinct: “With sustainability as a goal and potentially a foundation of California’s ‘green’ economy, to the extent the state does attract businesses, it will likely come from sustainable industries and processes.”

Another $600 Million to Invest

One of the ways the state plans to do this is through the development of newly formed Enhanced Infrastructure Financing Districts (EIFDs). “EIFDs return a mechanism to California local agencies that can help fund projects, which may in turn spur economic development,” the Kosmont report states.

The creation of EIFDs was authorized by SB 628, which enables a city or county to initiate a form of tax-increment financing which permits collaborative cities, counties and special districts to fund a broad array of economic development projects. These projects must conserve water, reduce greenhouse gas (carbon dioxide) emissions, and create new jobs in California.

“After wandering in the desert without effective economic development tools for a number of years, California is laying the groundwork to empower cities and counties to induce economic development,” says Larry Kosmont, president of the Kosmont Companies. “Although EIFDs are still a work in progress, getting TIF back allows the state to be more competitive in the fight to create economic development opportunities through attraction and retention of businesses.”

Leading the Nation

Brook Taylor, deputy director of communications for California GO-Biz, says the state’s re-envisioned approach to economic development is working. “In 2014, California led the nation in job creation with 498,000 new jobs — 102,000 more than the number two state, Texas,” he says. “Since June 2014, GO-Biz has awarded $180 million to 241 companies that are projected to create 35,000 jobs and $9.1 billion in investment — companies like Tesla, Amazon, Samsung, Hyundai and Red Bull. With another $600 million in available tax credits, California is on track to recruit more massive job-creating projects.”

Anchored by California Competes, Gov. Brown’s revamped approach to business development is “the most sophisticated economic development program in the US,” says Taylor. “We now have the largest corporate tax credit program in the US, the largest film tax credit in the US, the largest tourism marketing budget, and we are the first state to offer online applications for incentives.”

Mary Ingersoll, Executive Director of TeamCalifornia, a private non-profit dedicated to promoting California, says that the new California Competes program is already turning the heads of influential site selectors.

“I was at SIOR last week in Chicago. A consultant came up to me and said, ‘I think you guys really hit a gold mine with this,’ ” says Ingersoll. “It helps companies focus on what they are doing and see where they fit in best with the state. It does not have the geographic limitations that other programs had. It is a very focused and easily accessible committee that determines the awards of the tax credits. There is an online application process. If your project does not get selected this quarter, it can automatically go into consideration in the next quarter.”

Ingersoll notes that in its first year, California Competes has already enabled several major aerospace company expansions and a number of green technology company expansions.

Beyond the programmatic changes, Ingersoll says there is a revived spirit of cooperation permeating the state. “The state is working more cooperatively now than we ever have,” she notes. “We recognize that we are all in this together. We have different economies throughout the state, but we are all on the same team. People are no longer recruiting companies to move from one county to another. Instead, they are referring leads to one another. We have adopted the philosophy that a high tide lifts all boats.”

Evidence that California’s revamped approach to economic development is working is now pouring in:

  • California’s economy recently moved up to No. 8 on the world list. At $2.31 trillion, it now tops the total annual output of Russia.
  • California remains the leading state for venture capital. Last year, the Golden State raked in 51.3 percent of all VC invested in the US, far more than any other state.
  • California added jobs at the fastest pace in 11 years. The upward trend is likely to continue, according to a September report from the California Employment Development Department.
  • California remains the No. 1 state for attracting foreign direct investment. Internationally based companies now employ 561,000 California workers and are responsible for 4.6 percent of the state’s total private-industry workforce.

Business Portal is One-Stop-Shop

On top of the new incentive programs, the state announced July 1 the launch of the California Business Portal — a one-stop-shop website for business owners looking for information and assistance. The site, www.BusinessPortal.ca.gov, “is a response to the needs of the business community and their request for better online tools,” says Panorea Avdis, chief deputy director of GO-Biz.

The California Business Portal provides information to business owners on starting a new business, permits and licenses, incentives, local resources and more. Businesses can now file online applications for the California Competes Tax Credit and the California Film Commission Film Tax Credit directly through the new portal.

“We now have the largest corporate tax credit program in the US, the largest film tax credit in the US, the largest tourism marketing budget, and we are the first state to offer online applications for incentives. ”
— Brook Taylor, Deputy Communications Director, California GO-Biz

“As the global hub of innovation, California is often the first to meet challenges with novel solutions,” says Robert Callahan, California executive director for The Internet Association. “This portal is a great example of how government can harness the power of the Internet and empower citizens through the use of technology.”

Leaders in the business community in California provided input and advice prior to the portal launch. “It was a top priority of GO-Biz to get people from the business community involved in the development of the California Business Portal,” says Thomas Boon, IT chief for GO-Biz. “As a result, the ease of use and content are reflective of the type of information and assistance business owners need.”

Gurbax Sahota, president and CEO of the California Association for Local Economic Development (CALED), says that “the state has gone a long way toward changing the mood of local economic developers around the state. I like the model that the California Competes Tax Credit is using. It is one of the best practices in economic development. In the big picture, the state is moving into a stronger position.”

She adds that “we have talked a lot at CALED about promoting California. How do we put out a positive story about California using statistics? We have to have an answer to people who trash the state in the media. The reality is that we are turning around as a state. California is back in the lead in job growth and we are rebounding with our economy.”

The numbers appear to back up her claim:

  • In total construction value for office properties in 2014, California was No. 1 in the nation, beating out Texas, New York and Pennsylvania, according to Dodge Data & Analytics.
  • During 2014, California ranked second only to Texas in total construction value in each of three property categories: warehouse, retail and all categories. (Dodge)
  • Of the 300 largest metropolitan economies in the world, two California cities rank among the top 12 in GDP per capita — San Jose (third) and San Francisco (12th). (The Brookings Institution)
  • Of the 10 lowest national industrial vacancy rate markets, five are in California, including the three tightest markets in the US: San Francisco Peninsula, Greater Los Angeles and Orange County. (Cushman & Wakefield).
  • The four lowest non-CBD office vacancy rates in the country are all in California: San Francisco, Silicon Valley, San Francisco Peninsula and San Diego. (Cushman & Wakefield)
  • 55 percent of all venture capital deals in the US during the second quarter of this year were in California, New York or Massachusetts, with California leading the way with 488 VC deals (KPMG).
The San Diego skyline

Ron Starner
Executive Vice President of Conway, Inc.

Ron Starner

Ron Starner is Executive Vice President of Conway Inc. He has been with Conway for 16 years and serves as editor of the TrustBelt Report and lead organizer of the annual TrustBelt Conference. He also writes extensively for Site Selection and Conway's Custom Content Publishing Division. His Twitter handle is @RonStarner.

  



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California Investment Guide

The numbers alone tell the staggering story of California's economic dominance. Under Gov. Jerry Brown, California has delivered a balanced budget and a rainy day fund of $6 billion. The jobless rate has plummeted to 5 percent. And last year California created more jobs than Florida and Texas combined while outperforming the US in GDP growth.

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