Toyota to Texas: California Loses Yet Another Business

Count Toyota among the growing list of companies relocating from California to Texas.

Over the weekend, it was announced that the Japan-based automobile manufacturing company would relocate its U.S. operational headquarters from Torrance, California to Plano, Texas (a suburb of Dallas). Given that the Golden State has been home to Toyota Motor Corp. since 1957, the decision to relocate some, if not all, of the 5,300 California employees comes as both a surprise and a dramatic blow to lawmakers in Sacramento.

But for those living outside of California, is this move really that big of a surprise? The answer should be a resounding “No.” Here’s why.

According to the Tax Foundation, California’s total state and local tax burden of 11.35 percent is the fourth-highest in the nation. Additionally, the Golden State also boasts the tenth-highest corporate income tax (8.84 percent), levies the highest individual income tax rate (13.3. percent), and ranks 48^th in State Business Tax Climate (a generous ranking, considering Chief Executive Magazine’s annual “Best & Worst States for Business” survey has placed California dead least for the past several years.

Not a CEO or top executive earning at least $1 million per year? That’s all right, as California has high tax brackets for all types of earners.

On average, based on data from the Bureau of Labor Statistics, a sales manager in the Los Angeles, California Metropolitan Statistical Area (MSA) earns $129,050. A sales manager at Toyota earning that amount in annual salary, for instance, would be placed in the state’s sixth tax bracket with an income tax rate of 9.3 percent and a tax liability of over $12,000 per year. And that’s before factoring in the federal income tax rate of 25 or 28 percent, depending on marital status. However, the move to Texas would allow this sales manager to see his or her earning potential increase due to the Lone Star State’s lack of an income tax.

According to SaveTaxesByMoving.com –a project of the Laffer Center – a 35-year old married sales manager with one dependent could earn over half a million dollars more in his lifetime thanks to this corporate relocation, assuming he retires at the age of 65. From an employee standpoint, the move from California to Texas will allow for an increase in overall lifetime earning potential. The same is true for Toyota as a corporation.

Next month, when the company releases its fiscal year results, Toyota is expected to report a record 1.87 trillion ($18.3 billion) of net income. With 2.24 million cars and light trucks sold in the U.S. last year (roughly 380,000 units fewer than the record number of 2.62 million in 2007), forecasts have Toyota’s sales and revenue continuing this upward trend. By remaining in California with a combined corporate income tax rate of 43.84 percent and total tax liability of $8.02 billion ($1.62 billion of that total will go to California tax collectors), Toyota can only expect to see more of its profits go directly to the state – while the move to Texas will see Toyota paying no state corporate income tax. This means the car manufacturer can continue to grow and expand its operations without the state placing a penalty on its success.

While lawmakers in Sacramento and left-leaning California groups such as the California Budget Project are busy claiming the top percent of earners won’t leave the state due to high taxes, the businesses that employ middle-class men and women are fleeing the Golden State because of these same high taxes. Toyota Motor Corp. – with manufacturing plants in Kentucky, Mississippi, and Texas, to name a few – is just the latest corporation making the move from California to low-tax, business-friendly Texas. Under Governor Perry’s leadership, Texas has seen more than 50 businesses, including Campbell’s Soup, make this move because they know Texas’ pro-growth economic policies and limited government regulation gives them the opportunity to prosper and, in turn, allows their respective employees to do the same.