California is often portrayed as one of the nation’s least hospitable places to do business—a state burdened by high taxes, extensive regulation and bureaucracy that supposedly drives employers elsewhere. But the economic data tell a far more complicated story.
A new analysis by Orange County Register business columnist Jonathan Lansner ranks California as the nation’s 15th-best state for business after evaluating 36 economic and business indicators across six categories.
While the rankings confirm that California remains one of the country’s most expensive places to operate, they also challenge the notion that the state’s economy is fundamentally broken.
California ranked first in entrepreneurship, sixth in workforce quality and seventh in economic strength. Its weakest performance came in business costs, where it ranked 49th, ahead of only New York.
The rankings reinforce what a growing body of economic data has shown for years: California does not have a failing economy – it has an affordability crisis.
California remains one of the world’s economic powerhouses.
According to the Public Policy Institute of California, the state’s economy generated roughly $4.3 trillion in gross domestic product in 2025—about 14% of the entire U.S. economy—and ranks fourth globally behind only the United States, China and Germany. Technology, manufacturing, finance, agriculture and health care continue to anchor one of the world’s most diversified economies.
The state also continues to dominate industries that other states have spent years trying to replicate.
California leads the nation in venture capital investment, startup formation, advanced technology, agricultural production and entertainment. Its universities remain magnets for talent from around the world, while Silicon Valley continues to produce many of the companies shaping artificial intelligence, biotechnology and clean energy.
Lansner’s rankings highlight that strength.
California ranked first nationally for entrepreneurship, reflecting its continued leadership in innovation, venture capital, technology adoption and business creation. It also ranked sixth for workforce quality, recognizing its highly educated labor force, strong productivity and concentration of skilled workers.
The state ranked seventh for economic strength, measuring economic output, business health, access to capital and overall performance. Those rankings reflect an economy that continues to generate innovation, attract investment and produce outsized economic output despite persistent criticism of its business climate.
California ranked 30th in business friendliness, reflecting bureaucracy, permitting delays and regulatory complexity. Businesses routinely cite lengthy permitting processes, litigation risks, environmental review requirements and inconsistent local approval systems as barriers to investment.
California’s greatest weakness, however, was cost.
The state ranked 49th nationally in business costs, reflecting high commercial real estate prices, expensive electricity, labor costs and taxes. Many of those costs stem from the same structural problem driving California’s affordability crisis: an inadequate housing supply.
Housing policy and business competitiveness are often treated as separate debates, even though each directly affects the other.
When workers cannot afford homes near their jobs, employers must offer higher wages simply to recruit and retain employees. Teachers, nurses, firefighters, public defenders and other essential workers struggle to live in the communities they serve. Businesses face higher labor costs because employees spend extraordinary portions of their incomes on housing.
Young families delay homeownership or leave the state entirely. Longer commutes increase congestion and environmental costs. Homelessness rises as lower-income residents are priced out of the rental market. School enrollment declines in communities where families can no longer afford to live.
California did not become unaffordable overnight.
The state failed to build enough housing to keep pace with job growth and population demand.
Restrictive local zoning, lengthy entitlement processes, neighborhood opposition to new housing and the misuse of environmental review laws constrained housing production across much of California while the economy continued adding jobs and attracting workers.
Demand consistently outpaced supply, driving housing prices higher and pushing affordability further out of reach. California’s economic success created millions of jobs, but housing production never kept pace.
Critics frequently point to companies relocating portions of their operations to Texas, Arizona or Tennessee. Those moves are real, but they represent only part of the picture.
Many California companies expand elsewhere while maintaining significant operations inside the state. Others relocate manufacturing or back-office functions while keeping research, engineering or executive leadership in California because the state’s innovation ecosystem remains difficult to replicate.
Businesses continue choosing California because of advantages that extend well beyond cost. Access to highly skilled workers, world-class universities, venture capital, global transportation infrastructure, established supplier networks and one of the world’s largest consumer markets continues to outweigh higher operating expenses for many industries.
California’s continued economic growth reflects those advantages despite higher costs.
Some policymakers argue that deregulation alone will solve California’s economic challenges. Others point to California’s economic success as evidence that little needs to change.
The evidence points to a more nuanced conclusion.
California would benefit from more efficient permitting, faster housing approvals, modernized infrastructure and more predictable regulatory systems. At the same time, the state’s innovation economy remains among the strongest anywhere in the world.
Communities that resist new housing often frame the debate around traffic, neighborhood character or local control. Those concerns deserve consideration, but decades of housing scarcity have produced statewide consequences.
Workers commute farther because they cannot afford housing near their jobs. Employers struggle to hire. Young adults postpone buying homes or starting families. Essential workers leave high-cost regions. Economic inequality widens as homeownership becomes increasingly unattainable for middle-income Californians.
The benefits of California’s remarkable economy have become increasingly concentrated among those who already own property or possess substantial wealth. Working families increasingly find themselves priced out of the communities where they work.
Lansner cautions against treating any state ranking as definitive, noting that different weighting systems produce different results. If business costs receive greater weight, California falls in the rankings. If entrepreneurship carries greater weight, the state moves into the top 10.
Business rankings identify strengths and weaknesses, not definitive winners and losers.
California’s strengths remain extraordinary. Its weaknesses are equally clear.
The evidence suggests California’s central economic problem is not business formation or economic growth. The state continues to lead the nation in innovation, entrepreneurship and economic output. The defining challenge is that millions of Californians cannot afford to participate in that prosperity because the state has failed to build enough housing.
Until California addresses its structural housing shortage, affordability—not business vitality—will remain the state’s defining economic challenge.
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