California leads the nation in manufacturing jobs with nearly 1.3 million. But this doesn’t mean all’s well with manufacturing in the state. Job growth in the sector is miserable. We rank 24th in growth out of the 32 states that have more than 100,000 manufacturing jobs.
Michigan leads the country with more than 32 percent growth in manufacturing jobs since 2010, according to the California Manufacturing and Technology Association. Growth in California has been a paltry 2.57 percent, a little more than one-third of the national average of 7 percent.
California is also the worst state for cutting manufacturing costs, according to ITI Manufacturing, a Texas industrial equipment supplier that gives the state “low marks for taxation and regulations.” Meanwhile, Chief Executive Magazine has said that “California goes out of its way to be anti-business and particularly where one might put manufacturing and/or distribution operations.”
The magazine has ranked California as the worst state to do business for 12 straight years. In 2011, one California CEO said “no one in his right mind would start a new manufacturing concern here.”
His opinion is supported by the facts. The CMTA reports that in 2015, California had only 1.07 manufacturing investments per 1 million residents. That’s, again, last — and far behind national leader Kentucky, which had nearly 40 per 1 million residents. The national average is 9.38. At the same time, the state drew only 1.55 percent of all U.S. manufacturing investments.
In no single year since 2010 has California attracted “more than 2 percent of the country’s new manufacturing facilities,” says the CMTA. “Manufacturing employment has also lagged … if California kept pace with the national manufacturing job growth rate, we would have 50,000 more high paying manufacturing jobs today.”
So, while the rest of the country enjoys a turnaround, California is mired in a manufacturing slump. How has this happened? California has an educated work force. Its natural beauty and weather pull like a magnet. There’s plenty of room to expand facilities. Access to markets is matchless. Why wouldn’t a company want to increase its manufacturing presence in California? This state should be the manufacturing powerhouse it’s historically been.
But the steep price of enterprise in California is a hardship for business.
In addition to the burdens of punitive taxation and imposing regulation noted above, other factors compound the strain. Consider that the educated and productive workers that manufacturers need are expensive. California’s worker’s compensation premiums, at $3.24 for every $100 in payroll, are the highest in the nation. The national average is $1.78. While premiums have been in decline across the country since 2010, they’ve been ramping upward in California, despite reform efforts in the 2000s.
Electricity, particularly at industrial plants, is prohibitively expensive, too. Golden State manufacturers pay 79 percent more for power than the national average. The cost has climbed steadily since 2010, when they were only 44 percent higher than the U.S. average. These costs would grow higher if unrealistic renewable power mandates take effect.
Though it’s fallen behind, California could recover lost ground with sensible public policy changes. The CMTA suggests regulatory reform that would “create a predictable timeframe for manufacturers looking to site new facilities and expand existing ones.” It also recommends requiring “an independent analysis of the economic impact of major regulations,” and says agencies should be obliged to “regularly review existing regulations to determine if they are still necessary and effective.”
If Sacramento was interested in revitalizing manufacturing, it could tweak tax policy, as well. Under current law, qualified equipment purchases are levied a 3.3125 percent state sales or use tax. This exemption from the 7.25 percent rate lasts only through June 30, 2022, and there is a $200 million limit for purchases in a calendar year. Broaden the definition of a qualified purchase, make the exemption permanent and remove the cap.
Solving the state’s housing crisis would also help reboot manufacturing. It’s hard to lure the workers needed for a revival if housing is so expensive that the middle class is priced out of the market. Reducing electricity prices would also make a difference. Sacramento needs to take the curbs off power generation and let market competition trim electricity bills.
At one time, California had a wide competitive edge in attracting businesses. If it’s to re-establish that advantage, Sacramento will have to unwind its tangle of unforced errors.