When the Golden Goose Flies the Coop

Why businesses formerly located in the Capitol Region left for other states

Back Longreads Aug 15, 2022 By Steven Yoder

This story is part of our August 2022 print issue. To subscribe, click here.

It wasn’t supposed to end this way. Kerry Sachs is a son of the Capital Region if there ever was one. He and his brother Jim co-founded Puroast Coffee in Woodland in 1993, both are UC Davis graduates, and their father Roy was a professor there. A UC Davis researcher helped develop the company’s low-acid coffee. “Our company wouldn’t exist had it not been for UC Davis,” says Sachs. 

But in March 2021, Puroast closed up shop in Woodland and moved to North Carolina. Sachs points to problems in the state’s business climate. When the company opened a retail store in Florida in 2015, the California Franchise Tax Board sent them a bill — $25,000 to $30,000, he remembers — for revenue generated outside the state. They later looked into basing a franchise operation out of Woodland, but their research showed the state was one of the least favorable from which to run a franchise enterprise, in part because of state rules. Meanwhile, the costs to lease their industrial space rose, in part because of a state tax increase, he says. Their shipping and logistics costs went up too as they grew their national customer base during COVID-19, with more orders coming from the eastern half of the country.  

By late summer 2020, they were at the end of their lease and deciding whether to renew. Sachs and his plant operator started scouting other states and put together a report for their board and key stakeholders. North Carolina came out on top, and the board said it was Sachs’ call whether to stay or leave. “I said ‘Look, I think we need to move,’” says Sachs. When the company did, it took 25 jobs with it.

State and local business leaders point to a thicket of California policies they say are driving companies to leave for other states. And companies that have left the region say the state’s business climate is part of the reason.

More software engineers, fewer back office workers

There’s no reliable count of the net inflow and outflow of businesses in the region. But an August 2021 report from Stanford’s Hoover Institution said 300 companies moved their headquarters out of California from January 2018 through June 2021 — a figure likely understated since not all relocations are public, the authors noted. Fifteen of those left the Sacramento region. It didn’t tabulate companies that moved into the state from elsewhere, so the overall loss or gain isn’t known. 

Barry Broome, president and CEO of the Greater Sacramento Economic Council, blames state labor laws for making it harder to attract and keep businesses. He points especially to the Private Attorneys General Act, which allows employees to sue their companies on behalf of the state: GSEC’s internal data show that PAGA alone adds $10,000 in costs per job, he says. (A June 15 Supreme Court ruling limits, but doesn’t eliminate, the instances in which an employee can sue a company under PAGA.) 

Broome says the labor rules price California out of back-office, middle-income jobs — companies take those to places like Arizona, Idaho and Nevada. “We have a talent play around engineers and software and biotech and cell therapy — we’re better than everybody else in the United States, and if you want that best talent, you have to be here,” he says. “But the mom with three kids who’s working two jobs, she should be able to go to work at Wells Fargo and make $75,000 a year. That job doesn’t exist in Northern California because of the labor laws.” California ranked last in Chief Executive magazine’s 2022 poll asking roughly 700 CEOs and business owners which states are best and worst for business. 

“The mom with three kids who’s working two jobs, she should be able to go to work at Wells Fargo and make $75,000 a year. That job doesn’t exist in Northern California because of the labor laws.” 

Barry Broome, President and CEO, Greater Sacramento Economic Council

Of course company decisions about whether to stay or leave are often based on factors other than state policies on taxes and regulations, says Jeffrey Michael, executive director of the University of the Pacific’s Center for Business and Policy Research. But the state’s business climate doesn’t help, with California workers’ compensation costs among the highest in the country and labor laws on how exempt employees are treated raising company outlays, he says. “I think it’s not an issue of two or three (regulations) — it’s just a large thicket of regulations that have to be dealt with and I think some perception that the trend is toward more not less,” Michael says.

For Deborah Keller, CEO at Chordline Health, the immediate push was an almost 5 percent increase in their lease costs if they re-signed at their Auburn location in November 2020. After some research, she found the company’s per-square-foot costs were 3 1/2  times what they could be paying at a facility in Wilmington, North Carolina. In January 2021, the company moved there. 

The savings weren’t just on rent. The company paid an almost 9 percent corporate tax in California but pays 6 percent in North Carolina, and North Carolina gives businesses a credit for what they pay in federal taxes, which California doesn’t — overall they’re saving about 13 percent in state taxes on gross revenue after the move, she says. Labor laws were a factor too: California’s rules on minimum salary levels for employees to be considered exempt were forcing the company to raise salaries for some technical positions by 12 to 14 percent, which wasn’t sustainable, she says. 

“We didn’t make the decision lightly,” she says of the move, which pulled 47 jobs out of the region. “But we’re glad that we did it when we did it.”

And there are smaller fees that discourage companies. Steve Harari, who runs the business consultancy Narrow Path Advisors, moved in July 2020 from Grass Valley to northwestern Arkansas. Incorporating in California costs about $200, plus an annual $800 fee to keep current. In Arkansas it’s $45 to $50, and he pays no annual fee, he says.

 Plumas Bank President and CEO Andrew Ryback says Nevada’s less restrictive business climate was one consideration in his bank moving its headquarters from Quincy to Reno last year. The state’s business-friendly policies contribute to its strong economic growth, which in turn gave Plumas the chance to enter a growing market with few community banks, he says. He’s quick to add that California’s business climate “was a contributing factor but in no way a deciding one.” No employees were affected by the move, and the bank “will always support our foundational markets in northeastern California,” he wrote in an email.  

It’s not just the business climate

Like people, companies move for lots of reasons. Todd Mitchell is chief financial officer at RiceBran Technologies, which uses a patented process to stabilize fresh rice bran. His company moved its headquarters from West Sacramento to just north of Houston in 2018, though it still has a few facilities in West Sacramento. Primarily they wanted to be closer to their producers and customers in the Mississippi Delta, particularly with logistics costs skyrocketing, he says. Texas is also just cheaper: The company saves money on space for its corporate headquarters, and wage rates are lower while employees’ housing costs and taxes are also lower, he says.

He has some familiar observations: California has a “culture of regulation” — adding a structure or a piece of capital equipment costs the company about 30 to 40 percent more in California than in Texas because of the permitting and environmental impact studies California requires, he says. Still, the quality of California’s rice is far better than anywhere else in the country, in part because of state environmental rules, he says. “In many ways, we buy in and believe in everything California is doing to have a good environment and regulate so that it’s not a free-for-all,” Mitchell says.

Plus, better pay and stronger job protections in California mean he has a higher-quality, more invested workforce here — though that also means he can afford fewer workers per square foot in his California facilities, he says. “California is a premium market,” he says. “I’m not a California hater.” And  it’s not all nirvana in Texas — low taxes mean lower-quality services, so when his employees go to the DMV in Houston, it takes all day.

California’s political environment could also actually attract some companies. The state is overwhelmingly Democratic, and techpreneurs tend to support liberal policies on social and economic issues, though not on business regulation, according to a 2017 paper by researchers at the Stanford Graduate School of Business. So tech companies may prefer California’s progressive policies, because it helps them attract employees who are similarly inclined, says Michael. “Ultimately businesses rely on talent, and that’s inevitably connected to the (political) environment,” he says. (Indeed, following the Supreme Court’s June ruling on abortion, Gov. Gavin Newsom made a pitch to companies to come back to California, though whether it will work is anyone’s guess.) 

In other cases, business troubles have nothing to do with state rules. Harari says a big factor in his move was the rolling power outages. At one point he served as CEO of a communications company, and they’d get 24 hours’ notice of a coming outage that would last an unknown number of days, which had big impacts on their revenue. Those forced many of their customers to close shop.

Sometimes it’s geography. Aerojet Rocketdyne moved part of its operations — its defense headquarters — to Huntsville, Alabama in 2016. The company said in a statement they did so to be close to major customers but are “proud to maintain a strong presence in the Sacramento community.” 

Small signs of improvement?

For all that, a lot of California legislation gets defeated because business advocates convince leaders it would worsen the business climate. The California Chamber of Commerce publishes an annual list of job-killer bills it says would hurt job creation. It might as well be called the bill-killer list — as of June only five of the 18 bills the chamber had included on its 2022 list were still alive, and in the last five years, only five of 131 bills the chamber targeted became law. PAGA remains a big concern of the chamber, says president and CEO Jennifer Barrera. “One lawsuit under PAGA could literally take a small employer out of business. And a lot of these lawsuits are filed for technical violations where there was no actual harm or injury to the employee with regard to unpaid wages,” she says. 

She also sees positive signs. For all the untold suffering COVID-19 caused, it created more sensitivity to small businesses that she hadn’t seen previously at the state capitol. She points to the state’s COVID-19 sick leave mandate, which excluded businesses with fewer than 25 employees, and to state budget proposals being considered that would give some employers tax credits for the costs they incur under the sick leave policy.

Another business advocate also sees good things coming from Sacramento for the smallest businesses. Bianca Blomquist is the California policy director for Small Business Majority, an advocacy group whose network of 85,000 businesses have an average of four employees or less. She’s heartened by grants to micro-businesses that are coming through the state funding pipeline and by a 2019 law that relaxes regulations, allowing cities and counties to authorize “microenterprise home kitchen operations” in which an individual runs a restaurant out of their residence. 

When her group asks small business owners how they feel about regulations, they most commonly report problems at the local, not state, level — permitting, licensing, certifications and fees, she says. Blomquist doesn’t know the number in her group’s network who have left the state.

Positive signals or no, they weren’t enough to keep Puroast Coffee rooted in the home soil where it grew. For Kerry Sachs, the move to North Carolina was the right one, but he’s wistful. “We wake up and say we’d love to drive over to Napa. We’d like to head up to Tahoe over the weekend, head over to the Bay Area,” he says. “We miss California. … I grew up there. I still have a lot of family there. My wife and I raised our kids there. It’s just a spectacular place.”

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