California is seen as more regulated than other states, and many see regulations as dampening the business climate. Regulations are not imposed in a vacuum, however: they are meant to achieve some social benefit. Common business regulations include wage setting and food safety along with rules for taxation, banking and insurance, and environmental impacts; local governments also set business requirements such as permitting.

While the amount of regulation in the Golden State is similar to other states, the constraints within regulations set many more specific prohibitions or obligations. A summary of the data suggests that these constraints are associated with a lower rate of business starts when compared across all US states, particularly in manufacturing.

Due to the many jurisdictions setting policy, activities regulated, and how complicated regulations may be to implement and enforce, measuring regulation is challenging. We do not claim to capture all dimensions of regulation; our focus is on the written content of regulations—how many there are, what industries or behavior they cover, and how binding the regulations seem to be based on their language.

The number of pieces of legal code that businesses are subject to matters—as does how prescriptive or complex the code is. While California does not stand out for its number of business regulations, it does stand out for its number of regulatory constraints.

• California has about 1,300 business regulations (similar to the median across states), but each does not apply to all types of businesses—the average business is subject to about 8 regulations. Half of states have between 5 and 13 regulations per industry, and all states have between 1 and 27.
• Looking at the number of specific regulatory constraints—by occurrences of “shall,” “must,” “may not,” “required,” and “prohibited”—California is the most regulated. The state has about 420,000 such constraints, with about 3,700 constraints for the average business. This is the highest across states (the median is 1,400).
• California’s regulatory constraints mostly fall in three categories based on the agency that administers them—environmental, health, and industry and commerce.
• California also stands out in regulations related to banking and finance, security and justice, taxes, and transportation—although the numbers of constraints are relatively lower and the range across states is narrower.

Manufacturing is one of California’s largest sectors, broadly defined, and concerns about growing the sector are acute. For manufacturing businesses, California is among the most regulated states; regulations affecting this industry are largely concentrated around environment and industry and commerce agencies.

Whether to start a business, and where, is likely the business decision most sensitive to regulation.

• Between 2022 and 2023, about 51,000 businesses were launched in California, a rate of about 1 per 33 existing businesses. That rate is lower than the median across states and lower than the next two largest states, Texas (1 per 21) and New York (1 per 30).
• Manufacturing starts in California were lower than other business starts, with about 2 per 100 existing manufacturing businesses—lower than the median across states, similar to New York (2 per 100), and much lower than Texas (3–4 per 100).

States with more regulatory constraints tend to have lower rates of business starts; however, this is not a tight relationship. Factors beyond regulation likely drive businesses to start in one place versus another, including taxes, workforce, and productivity advantages. Moreover, businesses often choose to locate in large markets, which could be correlated with more government infrastructure for regulation, as the fixed costs to setting up and running regulatory institutions can be spread over more taxpayers (or businesses) in a larger economy.

California businesses are also subject to local regulations, such as the permits required to open and run a new business.

• In the typical city, California businesses must obtain about eight local permits (averaging across industries).
• Of four large cities, San Francisco is a bit below the median, whereas Los Angeles, San Diego, and San Jose are quite high.
• Permit requirements related to public safety, environment, identification/incorporation, and building and zoning are more pervasive.

The relationship between local permitting and business starts is mixed: it depends on the type of permitting and the type of business.

There are many business outcomes to consider, such as whether businesses grow or close faster or whether jobs created are higher or lower-paying. We focus on new business starts to provide a baseline for characterizing the burden of regulation and understanding its impact on businesses in California.