This fall's Proposition 24 once again raises the issue of whether state government policies are so anti-business that they drive businesses out of the state. Proponents of the viewpoint say that between layers of regulation not present in other states, as well as tax policy, California is tangibly business unfriendly. The other camp says that California is such a population and economic center that businesses would be irrational to leave the state.
In reality both sides are correct to some extent and one might argue that there is really no way to determine who is right. However, I think there is in fact very strong evidence of which argument is correct, based on an examination of economic activity on both sides of the Colorado River dividing California and Arizona.
I remember crossing the Colorado River nearly 45 years ago on a family vacation where we drove from Los Angeles to Texas. I did not return to that area until just a short while ago. Stopping recently in the towns of Blythe and Needles, I was amazed how so little had changed in 45 years. No offense to the good citizens of these towns, but the California side of the Colorado River was depressing. The streets of these towns were not very busy and there had been very little in the way of new construction since the mid 60s. Small local retail businesses far outnumbered any chain stores. The California side of the river was lined with cheap motels and the entire path along the river was either undeveloped or in disrepair.
On the other hand, the Arizona side of the river was amazing. Fancy river side resorts. Tons of new construction. Nice shopping areas with major stores. Gasoline prices almost $1 a gallon cheaper than the California side. The differences between the California and Arizona sides of the river are what I imagine the contrast was when a visitor crossed from communist era East Germany over to West Germany. The California/Arizona border is the one area where businesses have a choice of whether to operate in California or outside of California, and it is clear that anybody who really has a choice will not operate in California.
So while it's obvious that major retailers won't abandon Los Angeles and San Francisco due to the sheer number of customers, there's no doubt that if given a viable alternative, a business will choose to operate somewhere other than California.