New Survey Finds Doing Business in Southern California Remains Costly

Most businesses leaving California are headed for lower-cost western states, according to a survey by Claremont McKenna College’s Rose Institute and Kosmont Companies

The 2022 Kosmont-Rose Institute Cost of Doing Business Survey finds that the cost of doing business in California is higher than in other states in the western United States. The annual survey, published since 2003, finds that 64 percent of businesses that have moved out of California in the past 30 years have relocated to lower-cost states of Nevada, Arizona, Texas, and Oregon.

Researchers from the Rose Institute of State and Local Government at Claremont McKenna College, in collaboration with El Segundo-based economic development consulting firm Kosmont Companies, surveyed 158 cities–primarily in Southern California–to rank the costliest cities for doing business.

“Doing business in Southern California has many benefits, but the costs make it increasingly hard to pull off,” said Ken Miller, director of the Rose Institute of State and Local Government and an author of the survey report. “Rising home values, office rents, labor costs, and burdensome new state and local laws were variables to watch this year as these costs continue to escalate.”

Las Vegas, Nevada is the top destination for California businesses relocating out of the state. Between 1990 and 2019, 2,832 California businesses relocated to the desert city, followed by New York City with 1,455 businesses relocating there. The other leading destinations are Reno, Nevada at 1,088 businesses, Phoenix, Arizona at 883 businesses, Portland, Oregon at 868 businesses, and Austin, Texas at 816.

The survey found that within Southern California, the cost of doing business is more expensive in Los Angeles County than in Orange, San Bernardino, or Riverside counties. This difference can be attributed in part to market forces, such as office rents, as well as local policies, such as sales taxes. Los Angeles city voters’ recent approval of Measure ULA, which adds a large new transfer tax on the sale of properties over $5 million to fund homelessness programs, illustrates how businesses—especially those buying or selling property in the county’s largest city—will bear extra costs. 

At the state level, California continues to impose higher costs on businesses than neighboring states. For example, California’s statewide minimum wage will increase to $15.50 per hour on January 1, 2023, more than double the hourly minimum wage in Texas, Idaho, and Utah.  

Some small California cities found a spot on the list of least expensive cities for doing business, including Inland Empire cities such as Yucaipa, Yucca Valley, and Hesperia. However, cities in Arizona, Idaho, New Mexico, Nevada, Oregon, and Texas comprised most of the list of least costly cities. Three large Texas cities and commercial hubs–Fort Worth, Irving, and San Antonio–are all among the ten least expensive cities in the Survey.

“California remains an attractive place to do business despite the out-migration of businesses to other western states,” said Larry Kosmont, Chairman and CEO of Kosmont Companies. “Businesses that want to stay in California should ask themselves if they have a strategic or operational reason for being in California; otherwise, the state’s higher prices pose a real challenge to running a profitable enterprise.”

The Kosmont-Rose Institute Cost of Doing Business Survey ranking is based on seven variables including, sales tax, utility tax, business license fee, average office rent, FBI crime index, median home value, and minimum wage. The Rose Institute and Kosmont Companies last published a survey using 2018 data in 2019. The full survey report, list of the most and least expensive cities for doing business, and full rankings of the 158 cities are available at roseinstitute.org/costofdoingbusiness.