Reinventing Manufacturing

Strengthening California’s Environment for Manufacturing
Address the Cost of Doing
Business in California for
Manufacturers
The high cost of operating a business in California is
often cited as a reason why manufacturers choose to
locate facilities in other states. 42 According to an August
2014 study by the California Foundation for Commerce
& Education, California ranks 43rd of all US states in
terms of general business costs, ranking in the bottom
10 in terms of the costs of taxes, litigation, energy, and
labor. 43 The study also found that the average costs of
auto manufacturing and machine shops in California are
respectively 27 percent and 14 percent higher than the
average for other western states.
While the cost of doing business in California can place
a burden on some manufacturers, many companies
continue to produce in California and many others are
deciding to locate new facilities within the state. For
high-value manufacturers, the state’s large consumer
demand, proximity to foreign markets, high-skilled
talent, and network of universities and research centers
often can offset the additional costs imposed by regulation
and other state policies. However, manufacturers
that are less integrated with the state’s innovation
economy are more likely to feel burdened by the state’s
regulatory environment.
Three areas of high cost for manufacturers in California
are detailed below.
The Impact of Environmental Regulations
on Manufacturers
The California Environmental Quality Act (CEQA)
requires state and local agencies to identify significant
environmental impacts of their actions and to avoid or
mitigate those impacts. Most proposals for physical
development in California are subject to CEQA, as the
statute applies to all discretionary projects proposed or
approved by a California public agency. This includes
privately-funded projects such as those related to the
expansion or new building of manufacturing facilities.
The environmental reviews that CEQA requires can be
challenged in court by any group opposing the project
(often for reasons that are not environmental in nature),
adding time, cost, and legal complications to new
projects. For example, Japanese light-rail manufacturer
Kinkisharyo International almost scuttled plans to build
a new facility in the Southern California city of Palmdale
in 2014 due to a CEQA challenge from labor groups. 44
While the two sides eventually settled, the Kinkisharyo
example highlights the unintended consequences that
CEQA can have on manufacturing. Given the debilitating
economic impacts that CEQA can have, reform measures
continue to be a priority for many policymakers.
High Costs of Workers’ Compensation
in California
Workers’ compensation premiums make up an average
of 1.5 percent of manufacturers’ total employee
compensation costs in the US. (These costs include
wages, paid leave, retirement and savings, and other
legally required benefits.) 45 While a small overall cost,
that percentage is much higher in California—at 3.5
percent of costs—as of January 2014. 46 As neighboring
states such as Arizona, Oregon, and Nevada have
workers’ compensation premium rates well below
the national median, the added costs of operating
in California can deter some manufacturers from
expanding their in-state workforces. However, this is
less the case for high-value producers where capital
costs far outweigh the costs for labor.
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