October 24, 2016

Carl’s Jr. Flees California Over High Taxes


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

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Michael Guta

Michael Guta Michael Guta is a Staff Writer for Small Business Trends focusing on business systems, gadgets and other small business news. He has a background in information and communications technology coordination.

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13 Reactions

  1. This is 1 but many that are fleeing California. Both Toyota and Nissan have recently moved their headquarters out of California as well. California had become business unfriendly and outright hostile towards businesses years ago. The nitwit politicians in California are squarely to blame.

    • Michael Guta

      Hi Jim,
      There is study that says California has lost 9,000 business HQs and expansions to different states in the past seven years for the very same reason you pointed out.

  2. While this is a high profile example (Toyota is similarly moving their US corporate offices, but to Texas) there are likely many more businesses that move out of California or choose not to locate there because of the tax environment. There’s no such thing as a free lunch and while increased taxes on businesses is popular in the political world it can lead to these types of consequences.

  3. Michael Guta

    Hi Robert,
    Texas and Tennessee, as well as a handful of states are seriously courting companies and succeeding in getting them to move from high-tax states, and it seems to be working.

  4. Can’t really blame them, they’re a business and they’re there to make a profit. As long as there are loop holes in the system, they are legal to do that. The states are shooting themselves in their foot imo with all those taxes, and the residents are paying the price for it…

  5. The company denies moving for that reason, but you know better. This is nothing but propaganda.

    • Small Business Editor

      Hi Boris,
      And thanks for your comment. We’re certainly not the first ones to make this connection. But if you’re aware of another reason businesses seem to flee higher taxes and more restrictive regulations in favor lower taxes and less regulation, please add to the conversation.

  6. The article fails to mention that the largest corporate office will remain in Anaheim, right off of Carl Karcher Blvd. The main reason (not stated in the article) for the move is that all of the highest paid executives will be in Nashville, therefore establishing primary residency in a state with 0% income tax.

    As for all the complaining about California’s “unfriendly” business environment, it might make sense to apply “supply and demand” theory. California is an insanely desirable place to live: weather, attractions, and quality of life are high on the list of reasons why. When demand outstrips supply, prices rise, i.e. Cost of doing business / cost of living. If CA had the same tax climate of say a Nashville or Austin, would there be any room for people to breathe or enjoy the CA lifestyle? Witness millions of people and hundreds of businesses continuing to make CA an amazing, exciting place (Tesla, Disney, Apple to name a few). When one or two big businesses leave, the sky isn’t falling, it’s a matter of some choosing they would no longer like to pay the premium. If this became a long term trend, no doubt CA government (i.e. The people) would look to re-attract residents and businesses, a la Nashville style. For right now, there is hardly good reason to head down that path as the state continues to thrive in so many ways.

  7. Michael Guta

    Hi Jay,
    Thanks for commenting on the article.
    Before going into the tax disadvantages of California, we said “California has many pluses for businesses,” and some of the things you mentioned and many others is what makes the state a very desirable place to live and work in.

    However, it cannot be denied the tax situation is more than many businesses can handle. As you said, some companies, “Would no longer like to pay the premium.” And for them Tennessee, Texas and other states are a better alternative.

    One thing about business people is they can find opportunities almost anywhere. Whether it is California or Tennessee, there will be small businesses and large enterprises that will find a way to make it work.

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