All That Glitters: How Taxes and Regulation Are Tarnishing the Golden State

“California has created one of the most overregulated, expensive, and risky environments for businesses,” the company’s executive chairman, Marcus Lemonis, said in a statement on X. “It’s a system that makes it harder to employ people, harder to keep doors open, and harder to deliver value to customers.”

In response, California Gov. Gavin Newsom, who seems poised for a presidential run in 2028, mocked Lemonis’ complaints. “After their bankruptcy and closure of every store, like most Americans, we thought Bed, Bath & Beyond no longer existed,” Newsom stated in an X post. “We wish them well in their efforts to become relevant again as they try to open a 2nd store.”

Bed, Bath & Beyond, however, is not an outlier. It’s another sign of the slow withering of one of the most diversified and robust economies in the world, backed by a relatively well-educated workforce drawn to the many cultural and recreational charms of the mountainous, coastal state. But that’s no longer enough for the hundreds of companies that have relocated their headquarters from the Golden State in response to the rising costs of doing business there. Unaffordable housing for employees, the nation’s most generous minimum wage, sky-high taxes and fees, and some of the most stringent regulations in the country are among the reasons Tesla, Charles Schwab, and Chevron – the oil giant that was founded in Los Angeles in 1879 – and hundreds of other companies have moved their operations to other states. 

One result: California posted the highest unemployment rate of any state in July. This, in turn, is creating a doom loop crisis for the state’s indebted and fraud-ridden unemployment insurance fund. As employers are expected to shoulder the growing tax burden necessary to cover the fund’s obligations, more businesses are leaving the state altogether and taking jobs with them, compounding the problem. 

In January 2024, the state’s nonpartisan Legislative Analyst’s Office (LAO) warned that the unemployment fund’s “benefit payments exceeded state payroll tax contributions by $1.3 billion in 2023,” and the imbalance would balloon “to $1.6 billion annually in 2024 and 2025.” 

California is also indebted to the federal government to the tune of $22 billion as a result of a loan Sacramento took out at the start of the COVID-19 pandemic to help the state cover unemployment payments. This problem is exacerbated by mismanagement. Sacramento doled out $55 billion in fraudulent payments and overpayments during the pandemic due to poor oversight, leading the LAO to declare the unemployment insurance fund “structurally insolvent.” 

Bleak Reality for Workers

Newsom regularly touts California as the fourth-largest economy in the world due to its gross domestic product (GDP) of $4.1 trillion. But that metric conceals the increasingly bleak reality for the state’s workers. California has seen a 45% increase in unemployment since August 2022, according to the nonpartisan Public Policy Institute of California.

The institute’s economists argue that California’s official 5.5% unemployment rate is likely higher because the Bureau of Labor Statistics (BLS) counts anyone who works one hour per week as employed. The official unemployment rate also “does not capture those Californians who have stopped looking for work because the prospects are slim or those working part time when they’d rather be working full time,” the institute reports.

A far more detailed measure, known as U-6 according to the BLS website, which combines “total unemployed, plus all marginally attached workers,” suggests more than 10% of California’s workers may be unemployed, the highest of any state. The number jumps to 11.5% in Los Angeles County. 

Taking the U-6 metric into account, more than 2 million working-age California residents are either unemployed, underemployed, or have simply given up on finding a job. More positions are drying up, too. California lost a total of 54,800 private sector positions in the first three months of 2025, accounting for the largest decline in the nation. An increase in public sector jobs by many debt-burdened local governments and the state helped offset some of the decline. RIGHT?

Experts attribute some job losses to larger economic forces that California has little control over. The state has historically had higher unemployment relative to the national rate due to its younger workforce, which translates to greater job turnover. And the rise of artificial intelligence is hitting Silicon Valley’s workforce particularly hard. An estimated 36,000 Californians who work in the information industry lost their jobs in 2024 alone, partly due to the rise of AI. 

Several California-based tech companies, including Google, Meta, and X, cut tens of thousands of positions as the industry increasingly pivoted its focus toward AI to save on labor costs. AI replaced 30% to 50% of the workers at San Francisco-based Salesforce, according to CEO Marc Benioff, and the company cut 1,000 jobs in software engineering and customer support this year alone. Microsoft, which has campuses in the Bay Area, is reporting similar trends, with AI now writing 30% of the company’s code. Nationally, an estimated 10,000 jobs were lost to AI within the first seven months of 2025, according to a recent report from Challenger, Gray & Christmas.

President Trump’s trade war with China is adding to California’s employment woes. The state is the biggest U.S. importer of Chinese goods, forcing its companies and consumers to absorb a 30% tariff on most goods. As a big agricultural and technology exporter to China, California businesses also face a reduction in revenue from the tariffs imposed by the world’s second-largest economy. 

As the global trade war also poses risks to the broader U.S. economy, the outlook for California only darkens, with economists expecting the state’s job market to worsen in the coming months. 

Policies Lead to Job Cuts

Economists and business executives such as Lemonis, however, often cite state and local policies and the high cost of doing business as the catalysts for job cuts, business closures, or relocations to other parts of the country. At 8.84%, California has one of the highest corporate tax rates in the nation, and it’s applied uniformly and without graduated brackets. Every dollar of a company’s taxable income is subject to the same tax rate.

The individual income tax rate for S corporations is at an even higher 13.3%. California also requires corporations to pay an annual franchise tax of $800, in addition to a sales and use tax of 7.25%.

California’s lawmakers are now offering special tax incentives to entice production companies to bring film and television jobs back to Hollywood. The BLS reported that the state lost around 40,000 jobs in motion picture and video production in 2024, and entertainment unions report that 40% to 50% of their members are jobless. The jury is still out on whether expanded tax credits are having any impact yet.

Some economists also argue that employers are leaving the state as a result of California’s wage requirements. Employment at limited-service restaurants fell by 3.1% one year after California raised hourly wages for fast food workers from $16.50 to $20 per hour in April 2024, according to the St. Louis Federal Reserve.

Underscoring the doom loop narrative, not all of the 22,600 lost jobs were strictly due to the new policy. Michael Reich, chair of the Center on Wage and Employment Dynamics at the University of California, Berkeley, told CNN that his own analysis pointed to California’s population loss, slower economic growth, and rising fast food prices.

Minimum Wage Woes

Selvin Martinez, who works at a Wienerschnitzel in San Jose, told CNN that while he appreciates the pay bump to $20 an hour, the restaurant is now scheduling him to work fewer hours per week. The same goes for Edgar Recinos, who works at a Los Angeles Wingstop and lobbies his employer for more scheduled hours. 

Despite this track record, the state is making it more expensive to hire people in the massive tourism and hospitality industry, which has never fully recovered from COVID-era shutdowns. A new ordinance in Los Angeles increases wages for hotel and airport workers in steps from $25 an hour in July 2026 to $30 in July 2028, two weeks before the Olympic Games begin in L.A.

The Los Angeles Alliance for Tourism, Jobs and Progress attempted to repeal the ordinance through a ballot initiative. “It’s clear that the ordinance will jeopardize jobs, push hotels to the brink of closure, severely cut tax revenue the city desperately needs,” the group said, adding that it will “leave the city grossly unprepared for the 2028 Olympic Games.”

Business owners say crime is yet another factor leading to closures, particularly in Los Angeles, Oakland, and downtown San Francisco. American Eagle closed its flagship store in San Francisco’s Westfield Mall, citing more than 100 “significant security incidents”  involving firearms and threatening behavior between 2020 and 2023 that impacted customers and employees. Whole Foods and Nordstrom have also exited the city center, partly because of theft and safety issues. 

In Oakland, fast-food franchisees have locked dining rooms, keeping only drive-thru windows open after staff were threatened or assaulted. In-N-Out Burger announced it was leaving Oakland entirely and closed its store permanently in March 2024, marking the first such closure in the chain’s 75-year history. The company blamed persistent car break-ins, robberies, and theft.

Many critics blame these problems on what they consider soft-on-crime policies implemented by progressive district attorneys and state leaders. 

Unemployment Insurance Strained

Even before COVID-related layoffs took a financial toll on California’s unemployment insurance program, its fund was already operating at a deficit after being underfunded for years. 

The state’s LOA had warned about the problem in a report dating back to 2016. Last December, the office projected that the state unemployment program would operate at a $2 billion deficit each year from 2025 to 2030. 

Although “the state has, in the past, failed to build robust reserves during periods of economic growth, it has never before run persistent deficits during one of these periods,” the LAO report stated. It proposes either raising payroll taxes, cutting unemployment benefits, or a combination of both. 

The unemployment program is funded by employers paying an average of 3.5% in payroll taxes on the first $7,000 of each employee’s annual wages. While most states have updated their taxable wage base to keep their unemployment programs solvent, California hasn’t updated its since 1983. The LAO recommends increasing the taxable base from $7,000 to $46,800. 

“The state has had multiple opportunities to fix this system, and each time, it’s chosen to kick the can down the road,” said Rob Lapsley, president of the California Business Roundtable. 

The state’s need for $18.5 billion in federal loans to cover the program’s obligations during the pandemic turned out to be a costly move. Higher interest rates over the last several years mean that California now owes the federal government more than $22.7 billion, representing the largest unemployment loan balance in the country. 

Now the burden of that loan shifts to employers since the state failed to repay the debt within two years. This year, all businesses began paying a fee of $21 per employee, regardless of whether they work full- or part-time, and the fee will significantly increase until the state pays off its federal debt. 

“The state has never paid any money towards the principal, nor has it created any sort of credit or benefit for smaller businesses facing this significant federal tax hike,” said McGeorge School of Law Professor Chris Micheli.  

Michael Bernick, former director of the Employment Development Department, warned that California’s leaders are repeating the same mistakes. “We have a system that is guaranteed to collapse in every downturn,” he said. “Without serious reforms, California will continue to borrow billions, pass the costs to employers, and weaken confidence in state governance.”

With business taxes likely to keep rising, prompting more jobs to leave the state, California is facing one of its toughest economic challenges in many years. Newsom terms out in 2027, and a new business-friendly governor in a state that has elected many of them could be part of its rebound. But in the short term, with liberal majorities in control of state politics, it’s hard to see any viable route to restoring the California Dream.