How California — the land of startups — is least friendly for small business
To most Californians, loving your state goes hand-in-hand with wishing you could fix it.
When newscasts report about California’s business scene, the B-roll footage is likely of a 25-year-old engineer grabbing a Philz coffee on the luxurious Facebook campus. But California’s economy is far more than Silicon Valley entrepreneurs making billions reinventing how the world compresses digital files: it is home to a thriving community of small business owners.
Small business owners give California an “F” for friendliness
Largely overshadowed by their high-flying corporate neighbors, for every Californian working in advanced technology there are more than three who work alone or at small businesses with fewer than five employees. In the country’s richest and most populous state, millions of workers get up every day to serve their neighbors by fixing a leaky faucet or teaching a voice lesson.
Thumbtack connects people to these skilled entrepreneurs who are making a living by running service businesses. Every year since 2012, we’ve asked those small business owners what they think about the business climate in the geographic region where they work. And every year, California has come in last or close to last.
In the 2015 Thumbtack Small Business Friendliness Survey, respondents gave the state an F for its friendliness towards small business. The state earns an F for its regulatory environment, an F for the ease of starting a business, and Fs for its labyrinthine tax code and licensing rules.
How can the state that birthed Hollywood, Levi’s jeans, and countless internet giants be failing small businesses so badly? Does California care only about the 53 Fortune 500 companies headquartered here and not the 5.3 million very small businesses?
California small business owners tell us that they love the California market, but loathe the regulations.
For high-growth technology companies, California does several things right — from a world class university system that attracts federal research dollars and a global talent pool to the lack of enforcement of noncompete agreements, the state has manage to create a unique, difficult-to-replicate ecosphere for innovative businesses.
But for smaller businesses, California presents challenges that don’t exist in other states. In contrast to business owners elsewhere who emphasized the importance of effective business training programs, professionals on Thumbtack in California focused heavily on the regulatory environment. They told us emphatically that three things most heavily influence their opinion of the state government: challenging tax regulations, complicated labor rules, and the difficulty of gaining and maintaining a professional license. California earned F grades in all of these areas in 2015.
While our professionals tell us that they largely support California’s consumer and worker protections, they find that high costs make compliance nearly impossible. Yes, high taxes are a frequent complaint in California, but, surprisingly, the professionals we survey are less frustrated by out-of-pocket costs than they are by costs in lost time dedicated to understanding and complying with a complex regulatory regime.
According to our survey respondents, tax rates are not nearly as important as the system in place for collecting them. A professional plumber wants to be in the field building his business and helping his clients, not in the office navigating a difficult web of forms and fees that he can’t afford to pay someone else to deal with.
Regulatory overreach in California can lead to suboptimal outcomes for businesses and workers — one prominent example is how reluctant small businesses can be to hire full time employees due to high regulatory costs like California’s highest in the nation mandatory Worker’s Compensation premiums. As a result, some small businesses rely on 1099 contractors who are exempt from the benefits offered to full-time employees. This issue has been widely covered with regards to California startups like Uber and Munchery, but for millions of small business owners, these issues are nothing new.
Barriers instead of boosters
Hidden regulatory costs are an added tax that entrepreneurs can’t afford when they are just starting out. In California, there is an $800 business registration fee just to incorporate a LLC, which you must pay every year, whether or not you are making any money. A web designer from Los Angeles pointed out, “New business owners are the most vulnerable to failure, and the efforts spent on filing, obtaining licenses, and setting up payroll are excessive in comparison to other jurisdictions.”
Many well-intentioned rules may be impossible to comply with — one Bakersfield-based limo driver told us that he would be out of business by January 2016 due to a mandate to install what he called “non-existent push-out emergency windows” on his limo. The importance of this well-intentioned rule passed in response to a tragedy shouldn’t be minimized, but the costs of such rules add up and ultimately have the largest impact on middle-class business owners who can’t afford to comply.
The myth of the West
There is much to love about California, from the mild weather to the region’s laid-back vibe and cultural richness. Small businesses tell us they love living here, and the opportunities for service professionals to build a business are endless. But the state can’t take its endowment of natural beauty and past infrastructure investment for granted: states like Texas and Utah, which have historically done quite well in Thumbtack’s survey, are watching California closely for opportunities to poach businesses and workers.
Since turning a rugged desert outpost into a coastal oasis, Californians have consistently reinvented their sliver of land on a continent’s end — as Walter Isaacson documented in his book The Innovators, California has long played host to dreamers who reimagine and redefine entire industries. If this reputation is to stay intact, we must address what is ailing the state’s regulatory climate. A proposal from two economists for implementing cost benefit analysis at the state level has worked in smaller states like Maine to slow the flood of new regulations. Exempting new businesses or those without profits from the $800 fee and helping small employers afford to comply with well-intentioned laws like California’s new paid sick leave policy would be great first steps in showing small business owners that the state is listening and investing in them, too.
(this article was originally posted at LinkedIn Pulse)
