U.S. politicians often profess a desire to champion small businesses — and businesses in general. The economic development and job creation they bring are important.
But what promotes small businesses often promotes larger ones too — things like lower taxes and fewer regulations. And the reverse is also true. High taxes and too many regulations can cause businesses to flee.
Policy makers who doubt this, need do nothing more than look at the departure of Burger King to Canada. Though, Burger King denies it, the fact that Canada’s corporate tax rate is 15 percent versus 35 percent in the U.S. was probably a factor, reports Slate.
Also, by moving to Canada, Burger King will be able to escape paying U.S. taxes on profits made abroad.
But more recently, another example of a business fleeing — this time from one state to another — should be a reminder to local leaders of how local taxes and regulations can either encourage or discourage businesses, large or small.
California Business Tax
California has many pluses for businesses, but the California business tax rate is not one of them. The Tax Foundation ranks the state 48 out of 50 in its State Business Tax Climate Index.
The index ranks states on five areas of taxation that affect businesses. California has one of the highest tax rates in the country. And businesses are apparently looking for better alternatives.
So the recent announcement that Carl’s Jr., a fast food chain established in the state for more than 70 years, is packing up and moving its headquarters to Nashville should not come as a total surprise. However, the parent company, CKE Restaurants, said the relocation was made because it doesn’t need as much office space and is consolidating its operation with its other brand, Hardee’s.
Carl’s Jr. and Hardee’s are basically the same chain, except they operate in different parts of the country, with Carl’s taking up most of the western states and Hardee’s, the Eastern ones. The headquarters of both brands are also in different states, with Carl’s Jr. in California and Hardee’s based in Missouri — until the consolidation moves both headquarters to Nashville, that is.
And the taxes in California may not be the only reason for the move. CKE Restaurants CEO Andy Puzder told the Wall Street Journal in 2013, “California is not interested in having businesses grow.”
The article points out that many factors, including local building regulations, make one community less desirable than another for businesses.
For example, it takes 60 days in Texas, 63 in Shanghai, and 125 in Novosibirsk, Russia for one of CKE’s restaurants to get a building permit after signing a lease. But in Los Angeles, Ca. it takes a whopping 285 days.
Puzder added, “I can open up a restaurant faster on Karl Marx Prospect in Siberia than on Carl Karcher Boulevard in California.” The street in California is ironically named for the restaurant chain’s founder.
California’s labor regulations may also play a role in a company’s desire to seek alternative locations. In that same interview with WSJ, Puzder said his company had spent $20 million in the state over the past eight years on damages and attorney fees related to class-action lawsuits.
So what makes Nashville so attractive? According to Kiplinger, the city is very affordable, and the cost of doing business is also low. The city’s cost of doing business is 5.1 percent below the national average across industries. And for corporations, costs are 13.2 percent below average.
Fast food restaurants don’t have the greatest margin when it comes to profits in the first place. There is fierce competition, and each penny impacts the bottom line. Carl’s Jr. and Hardee’s will save a considerable amount by moving to Nashville. With a combined 3,400 restaurants around the world, both have to pursue every opportunity to save money.
Image: Hardee’s Restaurants