Are California businesses overregulated?

For decades, business leaders have complained that California’s regulatory climate has overburdened companies across the state, blaming a morass of rules, permits and paperwork for pushing businesses and jobs out of state and holding back economic growth.

To help measure the impact of the regulations, the Public Policy Institute of California, a nonprofit, nonpartisan think tank, sought to compare the number of business requirements in the state with those in other parts of the country.

In a new report, researchers with the PPIC found that while California is not an outlier nationwide when it comes to state and local business regulations, it has by far the most specific constraints on businesses — defined as regulations containing the words  “shall,” “must,” “may not,” “required” and “prohibited.”

The researchers found that states with more of these types of strict regulations — ranging from environmental standards to consumer safety protections — tend to see fewer new businesses forming, though the report stopped short of establishing a definitive causal relationship.

The Bay Area News Group spoke with one of the study’s authors, Sarah Bohn, vice president and director of the institute’s Economic Policy Center, to learn more about the report and the potential consequences of business regulations in California. This conversation has been edited for length and clarity.

Q How are business regulations more stringent in California compared to other states?

A We were actually kind of surprised to find that California has around the same number of regulations, broadly speaking, about 1,300 that relate to businesses. It’s in the middle of the pack across U.S. states, even though we’re perceived as having much more regulation than other states.

But when you look closely within the text of regulations, California’s regulations have a lot more specific constraints and prohibitions. That amounts to over 420,000 specific constraints. Those don’t apply equally to all businesses, so we do some data wrangling to get a better number for the amount of constraints on the typical business (3,737 constraints per business, compared to a national median of 1,400). That kind of encapsulates the story about California regulation, which is that there’s just a lot embedded in what we’re trying to regulate in the state.

Q What impact can those constraints have on California businesses?

A One of the most typical complaints that you hear is it’s hard to attract businesses to California because of the regulatory burden. So we did an initial look at the rate of business startups.
We looked at some recent data that’s specifically for 2022 to 2023 and found it’s a rate of about three new businesses for every 100 that exist. That’s actually relatively low across U.S. states — the median is between four and five. These numbers sound very close together, but it’s actually a statistically significant increase.

And that correlates, not just in California. It turns out that that relationship shows up when you look at all U.S. states. So states that tend to have more regulation have lower rates of business starts. But of course, a lot of other things matter for whether a business can start. We take this as initial evidence of the concerns about a high-regulation environment and what that could mean for business dynamics in the state.

Q What can fewer business starts mean for the state’s economy?

A Of course, it matters for economic growth. We’re one of the largest economies in the world, but we’ve also been growing more slowly over the past few years. We’ve added relatively few jobs — it’s been slow since about the middle of 2022. We have many superstar firms, sectors and opportunities for building wealth. But actually, job growth, the kind that we rely on month by month, year to year, to increase opportunities for communities and across the state is disproportionately driven by small and new firms that start in the state.
The majority of job growth comes not from some of the headline big firms that we know about in California’s economy.

One of my concerns is: Are we at a point in terms of the regulatory environment and other factors that it’s going to be harder for new businesses to start, to grow jobs, to fuel both communities and the state’s economy overall?

Q There’s the argument that strong regulations are needed to protect workers, consumers and the environment. How should policymakers balance those protections and economic growth?

A That is the question, and I hope that our continued research can inform some of that, which really will require a deeper dive than this report. A lot of businesses in the state understand that California has regulation that protects our environment, protects workers, and a whole host of things that they may very much buy into and want to comply with. But sometimes when you have just such a large number of regulations, it becomes a lot harder to navigate. There can even be conflicts in regulations that are on the books that might be developed by different agencies.

It’s important to have a process for evaluating that, and for ensuring that when new regulation comes online, it’s relatively straightforward for businesses to comply with for the purpose of helping businesses achieve the ultimate goal that the regulation was set out for in the first place. I don’t know that that’s done consistently in California. And that’s where I would point to in terms of where to look. Who bears the cost, and who benefits from regulation?
It may be those that you intended. It may not be. And so looking at the upshot of all of that is huge. Given the very simple fact that California is at the extreme in terms of regulation, it suggests that there is room to improve.

Sarah Bohn Bio:

• Organization: Public Policy Institute of California
• Age: 48
• Birthplace: Minnesota
• Residence: San Francisco
• Education: BA Math and Economics, Lawrence University; PhD Economics, University of Maryland-College Park

Five Facts:

• Bohn was raised in Chicago but found her way to the best coast after graduate school and has now lived in California longer than anywhere else.
• She is a proud aunt of two nieces and two nephews, delighting in supporting their pursuits and learning Gen Alpha lingo from them.
• Bohn loves to bake and is disappointed that remote work has reduced the number of ready taste testers at the office.
• She credits online algorithms and a common devotion to the Chicago Bears with finding her perfect match of over 13 years.
• Bohn loves traveling to new places as much as she loves coming home to California.