All private firms are in business to maximize profit. If they don’t, they will soon be out of business. A firm can achieve this by increasing their revenue, cutting their cost, or a combination of the two. Since consumers strongly influence a firm’s revenue, the primary factor that a firm can control is their cost.
Under pressure to change their headquarters from the high cost and stifling regulatory structure in California, Toyota-the world’s largest auto manufacturer-searched for a place that would allow them to cut costs and compete better long-term in the U.S. market. According to the Tax Foundation, California‘s business tax climate ranks 48th, income tax ranking is last, sales tax ranks 41st, and state-local tax burden is the 4th worst nationwide.
Clearly, these high taxes make it difficult to run a business even in beautiful Torrance, California. Given Toyota’s desire to maximize profits, they made the decision to leave, it was just a matter of to where.
After considering different places to move, they chose the place with the 11th best business tax climate, no income tax, and the 3rd lowest state-local tax burden: Texas.
The benefits don’t stop there. Texas’ cost of living is 40 percent less than California’s. Property tax rates are higher in Texas, but California’s real estate costs are so much more that any gains made by paying a lower rate are marginal at best.
Overall, it was in Toyota’s best interest to leave California.
The Texas model of low taxes, modest government spending, and sensible regulation provides an economic environment that leads people and companies to move here. We can see this by the large migration to Texas from other states and the fact that Texas took over the number one stop in tech exports from California in 2012.
As a secondary incentive, $40 million of taxpayer funds through the Texas Enterprise Fund was used to lure Toyota here. Since Toyota already decided to leave California, short-term incentives were ancillary to their marginal analysis.
Until California takes steps to keep taxes low and provide a stable regulatory and lawsuit environment that benefits businesses and consumers alike, the Toyotas of the world will continue to flock to Texas.