The aerospace exodus from California 

It's no longer a secret that businesses are leaving California in droves. That includes aerospace. The beleaguered state - once touted as a progressive, forward-thinking policy trailblazer - has raised its taxes and spent itself far away from any Utopia it once hoped to create. And California entrepreneurs aren't stupid. The sunshine is nice. But without the fertile soil, it's hard to thrive in a economic desert.

Consider the aerospace industry. The Washington Examiner's Opinion Zone blogger Lynn Mitchell expains to us that Northrup Grumman will leave California to relocate in Virginia. The Commonwealth beat out neighbors in the District of Columbia and Maryland due to a lower corporate tax rate - despite higher corporate welfare offers from those other states. (This is some anecdotal proof, at least, that tax competition works.) Being in VA makes meeting with your buyers in the great 'appropriations game' a lot easier, as well.

Still, other aerospace companies are now threatening to leave California, too. Orbital Outfitters of North Hollywood, CA and Mohave-based XCOR are startups who stand to get nailed with far higher taxes if they become profitable. A local Sherman Oaks/Encino newsletter quotes one of the businesspeople threatening to take their piece of the industry to healthier climes.

“This is a great place for us to find the expertise we need,” explains angel investor and XCOR Board-member Lee Valentine. “It’s a great place to build spacecraft, because we’re close to the specialty manufacturers.” But Valentine puts it bluntly when it comes to the taxes. Not only do other states have lower taxes, but they "are offering us good money to relocate!” 
Valentine added in a telephone conversation that as soon as XCOR reaches profitability, he has a responsibility as a Board-member to "advise the company to leave California." And he's not alone.

Unfortunately, the corporate incentives arms race has become a part of the harsh economic reality. Politicians are desperately trying to "bring jobs" to their state to fight recession, so they're reaching into the pockets of cash-strapped taxpayers for new giveaways that will attract companies (and get them ribbon-cutting pictures on page A1). Companies can be put at a competitive disadvantage if they fail to find the right mix of low taxes and subsidies - so the system is pretty perverse. But as long as the rules exist, companies and politicians will continue to play within them to mutual advantage. Sadly, many states end up attracting the most desperate and insolvent companies looking for a quick infusion of cash. Real entrepreneurs look for reasonable and stable business environments, not quick one-time cash.

In any case, there's not much California can do now to stop the bleeding. They've dug themselves into such a fiscal hole that they have to have the revenue. Even if Ronald Reagan's zombie rose from the grave to become Governor - returning fiscal sanity -- it's not clear that businesses would trust the state to keep fertile soil over the long run.

The state's reputation for bureaucratic elitism precedes it. It's also not clear how much wealth California would have to create to dig itself out -- particularly as Obama and Congress are doubling down on all manner of dubious Keynesian policies and heavy deficit spending. (And, as Arnold Kling writes, there is at least no national precedent for reducing the ratio of debt to GDP by growing out of it.)

I don't want to augur the worst, but could L.A. soon look like Detroit? Well, not tomorrow. But in a decade or two Iowa and North Carolina could vie for the buying off of Tinseltown with tax credits and subsidies--particularly if these states don't shoot themselves in the foot as California has by raising taxes to unmerciful levels.

So what is the moral of this story?

For long-term economic health, the tried-n-true rules for wealth creation - low taxes, reasonable regulations, and streamlined, cost-effective public infrastructure - still apply.

California abandon these rules over the last two decades and is now paying a very high price: the loss of some of it's finest businesses.

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Max Borders

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