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The paradox of doing business in California

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More than 50 years ago, Woody Guthrie called California "the garden of Eden"—for those that could afford it. The American folk singer died in 1967, long before the term Silicon Valley had entered the American lexicon.

Yet his words still ring true for the vast number of entrepreneurs hoping to start the next Apple, Google or Twitter or the many aspiring filmmakers waiting tables in Hollywood, hustling for their big break. California was ranked 32 in CNBC's Top States for Business.

With by far the largest economy among the 50 U.S. states with nearly 2 trillion in GDP—one outsized enough to rank among the world's 10 biggest countriesCalifornia's business attributes are plentiful. Any young tech executive would love the opportunity to hop in a car for a meeting with Larry Page, Mark Zuckerberg or Larry Ellison or someone who knows someone who knows one of them. For money, Menlo Park's Sand Hill Road and nearby Palo Alto are home to the country's biggest venture capital firms, responsible for financing the most successful tech, biotech and alternative-energy companies. More than half of U.S. venture investing in the first quarter went to California start-ups, according to the National Venture Capital Association.

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Love Cabernet? From Sonoma and Napa in the northern half of the state down to Santa Barbara in the south, California is home to 90 percent of U.S. wine production, thanks to its unique climate and soil. Manufacturing and tourism are also growth engines. With all that money sloshing around, and employees across industries demanding better perks, banks and health-care providers are thriving.

But those perks cost money. That burden falls on businesses of all sizes, which are scratching and clawing for talent, pushing some of Silicon Valley's richest companies to offer everything from three meals a day and subsidized housing to yoga studios and massage parlors. In terms of real estate, not only do businesses have to deal with a surging commercial market but they have to pay more to employees to cover rising rents. Companies are further hampered by a tax rate that's in the top quarter of U.S. states.

"California is a phenomenal place to work, based on work life, weather and the creative culture," said Ash Kumra, co-founder of DreamItAlive.com and co-leader of Startup California, a partnership designed to help local emerging companies. "It's your duty to pay taxes. You might pay a little more than other states, but look at all the things you get."

Then there's regulation and more regulation. California's progressive political roots have led to a heightened concern toward the environment, which results in companies having to spend on recycling, programs to reduce carbon emissions and updating building standards. It's also created a labor law system that, compared with most other states, favors employees over employers.

Given how successful California-based companies have been in the past half-century, legislators have few incentives to make dramatic changes, leaving executives in the bind described by Guthrie. As he presciently sang in 1961, California is a "paradise to live in or to see/But believe it or not, you won't find it so hot/If you ain't got the do re mi."

By CNBC's Ari Levy. Follow him on Twitter: @levynews

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