Does California deserve its reputation as a state that burdens business with many regulations? At a recent event, David Neumark, UC Irvine professor and PPIC adjunct fellow, and Sarah Bohn, director of PPIC’s Economic Policy Center, discussed a new report examining the number and restrictive nature of California’s regulations and their effects on business launches.

California businesses are subject to a typical number of regulations as in other states, which averages about eight. However, when it comes to constraints—as measured by restrictive language such as shall, must, prohibited—California has far more than other states, landing at 3,737. Most restrictions come from agencies responsible for industry and commerce, environment, and health services; Neumark stressed that this number is not sensitive to the industry mix in the state.

“Regulation is in the text of bills and of laws,” Bohn said; the authors turned to the QuantGov tool to help quantify restrictive language in state policy text.

Comparing constraints to business starts across states revealed two things, according to Neumark: with more regulatory constraints, business start rates were lower “and California is an outlier among states, with the lowest start rate.” However, Neumark added that the difference is not statistically significant—meaning that business starts may vary so much across states due to other factors.

“California regulates businesses in a lot of dimensions,” Neumark said; regulations are typically chosen to achieve certain goals, such as environmental regulations for water quality or to improve quality of life through minimum wages or health and safety regulations. “But it can entail a higher cost to businesses and consumers … and business might be harmed in some ways.”

Such harm can be reflected in some companies choosing not to open or expand in the state or choosing not to hire, Neumark explained. In particular, regulations may seem daunting for new, smaller businesses—leading firms to go elsewhere. Furthermore, regulations may contradict one another or the language may make it difficult for businesses to comply.

While firm size was not a research focus, it could matter. “Larger firms may have more capacity or experience in handling regulatory compliance,” Bohn said. “The extent to which regulatory burden advantages big firms relative to the small mom and pop firms … is definitely a concern.”

Even this advantage may not be a buffer; Bohn pointed to a recent PPIC report indicating a slight upward trend in headquarters leaving the state. The decision on where to locate headquarters, however, involves many issues beyond regulations.

In terms of permitting—or, the local version of regulation—not much variation appears within California or between the state’s big cities; most localities require between seven and nine permits. And there is little correlation between permitting and business starts.

Questions remain around the complexity of regulations, how they are enforced, and whether businesses are held accountable. While the current research highlights the impact of regulations on businesses owners rather than recommendations for policymakers, Neumark suggested the state might examine old regulations or those that are contradictory or complex in an effort to begin streamlining.