Back in November, I analyzed the Census Bureau’s state-to-state migration data for 2018 (“Top 10 inbound vs. top 10 outbound US states: How do they compare on a variety of tax burden, business climate, fiscal health, energy/housing costs, and economic measures?“) and found that the four top outbound states in that year were New York, Illinois, New Jersey, and California (see table above). The obvious reasons for the significant outmigration from those four states in 2018 include high taxes, high home prices, high energy costs, business-unfriendly environments, excessive regulation, poor state fiscal health, and stagnant job and overall economic growth. State-to-state migration data for 2019 will be released in November and I’ll update and post the analysis then.
From Joe Vranich, president of Spectrum Location Solutions, I learned by email about an interesting new market solution to help companies relocate from high-tax, high-cost, fiscally unsound, and heavily regulated states like California to low-tax, low-cost, fiscally sound and less regulated states like Texas, Nevada, Florida, and Arizona (all among the top ten inbound states in 2018). Joe recently sent the following email to a number of news outlets:
The horrifying Defund the Police movement that California politicians are endorsing is likely to cause an upsurge in companies planning to leave the state. Adding social upheaval to California’s harsh business environment may be the “final straw” for companies that have been undecided about an out-of-state move. That’s most likely to be the case for companies based in San Francisco, Sacramento, San Jose, Los Angeles and San Diego, each of which has seen civil unrest.
The news is private investors are now willing to underwrite relocation costs for companies that move from high-cost, business-hostile states (not only California, but also New York, New Jersey and Illinois) – to business-friendly states where they can enjoy greater profitability and growth.
The new program to finance out-of-state moves is perfectly timed for beleaguered companies. California is our #1 target because the irresponsibility of California’s politicians has reached new levels. This year alone business taxes will worsen, new employee mandates will add to labor and litigation costs, and higher electricity prices are a certainty for businesses and consumers.
This June 30, 2020 press release provides details on how this new “markets in everything” solution will work:
Investors are launching a new program that will incentivize more companies to leave California – and other states with punishing taxes and regulations, such as New York, New Jersey and Illinois — in favor of friendlier business climates found elsewhere. As of today, a private equity firm will pay relocation costs, making it easier than ever for entrepreneurs to exit troublesome states. Business owners know they can improve profitability through an out-of-state relocation, but many are reluctant toundertake the costs of moving and finding a suitable building or land.
“Investors are seeking to provide capital to companies with annual revenues from $5 million to $200 million that are likely to enjoy greater profitability in a business-friendly location,” said Joseph Vranich, president of Spectrum Location Solutions. “In certain circumstances, investors will purchase a company outright and move it to a more appealing state,” said Vranich.
Investors will provide financing tailored to meet individual circumstances, such as:
* Purchasing property and building a building, or buying and improving one for the company with lease and lease-to-purchase options. Lower capital expenditures can be found in other states where land and buildings are less expensive and where streamlined permitting approvals allows faster construction.
* Enhancing company owners probability of selling or re-capitalizing their businesses, which is particularly helpful to owners that are implementing generational transitions (i.e., family-owned businesses or founders that are seeking a liquidity event).
* Providing capital in the form of equity, debt, preferred equity and also the outright acquisition of a business.
“A primary objective is to invest in companies in a way that enables them to thrive in a more attractive location,” said Vranich.
For example, a California firm moving to Texas could save about 35 percent in operating costs thanks to lower taxes, a more reasonable regulatory environment, lower workers’ compensation costs, and much lower energy costs. Some other states offer similar benefits.
“Companies are finding that high numbers of employees are willing to move to out-of-state locations that offer tax savings, superior school systems and affordable housing,” said Vranich.
“The coronavirus has introduced a new factor as real estate experts report a surge in people looking to relocate to suburban communities from our biggest cities,” he added. “The American Enterprise Institute reports that the pandemic’s infection rate has been quite low in small cities and towns, so it’s no surprise that people are willing to move to places that reduce “exposure density” and where infection appears less likely.”
Over a recent eight-year period, it’s estimated that about 13,000 companies left California in full or in part and nearly $77 billion in capital was diverted to out-of-state locations, according to research by Spectrum Location Solutions, a site selection consulting firm.
“No one needs to take my word for why company leaders are unhappy in California,” said Vranich. “Now, for the 20th consecutive year, CEOs nationwide surveyed by Chief Executive Magazine have declared California the worst state in which to do business.”
Bonus Chart: An updated chart below shows the current one-way, 26-foot truck U-Haul rental rates between California and Texas. The 5-to-1 one-way truck rental rate ratio suggests that there are about five times as many trucks leaving California for Texas as there are trucks returning from Texas to California.