Why In-N-Out Burger and Other Companies Are Leaving California

The Exodus of Businesses from California

California, historically regarded as a hub of opportunity, innovation, and prosperity, is witnessing a significant departure of businesses relocating to more favorable environments. This trend was highlighted recently when In-N-Out Burger announced the closure of its Irvine headquarters after three decades, opting instead for a consolidation of its West Coast operations in Baldwin Park and a new eastern headquarters in Franklin, Tennessee.

The reasons driving this exodus are multifaceted and reflective of broader economic shifts. As policies designed to increase government oversight proliferate in Sacramento, businesses are increasingly choosing to leave the state, seeking environments that are more conducive to economic growth.

Tax Policies Driving Businesses Away

California’s tax structure is among the most burdensome in the United States. The state imposes a top marginal income tax rate of 13.3%, the highest in the nation, coupled with an 8.84% corporate tax rate. In stark contrast, states like Texas and Florida enjoy the advantage of zero state income tax, prompting many businesses to consider relocation.

Moreover, states adjoining California, such as Nevada, also offer favorable tax conditions without imposing an income tax, enticing businesses and individuals to relocate across state lines. This competitive environment incentivizes companies to depart from California’s high-tax climate.

Regulatory Burden and Anti-Business Policies

High taxation is not the only hurdle. Companies in California grapple with stringent regulations that restrict their operational flexibility. The passage of Assembly Bill 5 severely limits the use of independent contractors and freelancers, directly impacting industries reliant on these employment models. Governor Gavin Newsom’s advocacy for a $20-an-hour minimum wage has further escalated operational costs, making it difficult for businesses in the hospitality sector, for instance, to maintain profitability.

The regulatory landscape extends beyond wage laws. Aggressive legislation, such as the California Consumer Privacy Act, complicates compliance for businesses, particularly smaller enterprises that may lack the resources to navigate extensive legal requirements. Furthermore, ambitious environmental policies, aimed at promoting sustainability, often impose costly compliance mandates, further burdening operational expenses.

The Cost of Living Crisis

California’s exorbitant cost of living significantly impacts businesses as well. Employees face daunting housing prices in major metropolitan areas like San Francisco, Los Angeles, and San Diego, where median home prices frequently exceed $800,000. The state’s stringent zoning laws and environmental regulations exacerbate the housing crisis, complicating efforts to increase the supply of affordable homes.

For businesses, the implications are clear. Companies must raise wages to attract talent, leading to higher operational costs that, ultimately, are passed on to consumers. Many organizations find it easier to migrate to states where employees can afford housing and maintain a reasonable standard of living, resulting in the boom of cities like Nashville and Atlanta over the last decade.

The Crime and Infrastructure Challenges

California’s urban landscape is increasingly marred by crime, homelessness, and crumbling public infrastructure. Once a symbol of economic vitality, cities like San Francisco have earned notoriety for rampant theft and uncontrolled homelessness. The closure of major retail stores, such as Nordstrom and Walgreens, can be traced back to rising crime rates driven in part by lenient laws that decriminalize theft under certain thresholds.

Businesses express reluctance to operate in environments where employee and customer safety are compromised. Unfortunately, state leaders often sidestep accountability for the decline in law and order, opting to shift blame elsewhere.

Remote Work as a Catalyst

The pandemic-induced shift towards remote work has accelerated the outmigration of businesses from California. With companies no longer tethered to a physical location, many executives are reconsidering their operational bases. The flexibility to relocate has led numerous businesses to prefer states with lower taxes, lighter regulations, and improved living conditions for employees.

State Leadership’s Response

Rather than adapting to this changing landscape and enhancing California’s appeal for businesses, state policymakers have doubled down on the very policies driving companies away. This approach has resulted in an alarming surge of capital and talent departing the state.

Welcoming Alternatives to California

As more enterprises exit California, states such as Texas, Florida, and Tennessee are positioning themselves as attractive alternatives. These states extend invitations to businesses with zero income tax, reduced corporate taxes, fewer regulations, and a political climate that fosters enterprise. Texas, in particular, has emerged as a new epicenter for companies like Tesla and Oracle, which relocated their headquarters seeking a more favorable economic atmosphere.

Florida has similarly attracted tech and financial firms, benefiting from stable and business-friendly governance.

Understanding the Shift

The departure of In-N-Out Burger, a beloved fast-food institution, serves as a microcosm of the larger trend affecting California. Research from the Hoover Institution indicates that over 350 businesses relocated their headquarters from California between 2018 and 2021, including 11 Fortune 1000 companies. With California becoming increasingly challenging for businesses, In-N-Out Burger has opted to embrace a new locale, prioritizing lower taxes and a more favorable business climate.

This trend of relocation is not only reflective of corporate strategy but is also indicative of a broader cultural shift towards valuing economic sustainability and operational efficiency in the post-pandemic world.