Ah, California. We make a pretty big deal out of you, for seemingly little reason. Those who live in places like Oregon, Oklahoma, and Ohio, have every reason to scratch their heads wondering what the fuss is all about.

Why do business in a place known for wildfires, earthquakes, an $11 billion budget shortfall and a corporate tax burden to rival Sweden? Yet 38 million people choose to live here. Yes, we have the weather, and there are few things as breathtaking as the state's Central Coast (read "East of Eden"). But, for many, there's more to it than that. Despite 72,385 rules forced on every employer in the state, people keep starting businesses here. Why? Because even in an entrepreneurial country, Californians feel especially compelled to give birth to the new: whether it's a rocket, a wine, a movie, or an iPod. But it ain't easy.

This week 300 small business owners showed up for the Governor's Summit on Small Business and Entrepreneurship, a conference Arnold Schwarzenegger squeezed in on a day where he spent most of his time nearby at a Global Climate Summit.

I spoke with Scott Hauge, a fourth generation San Franciscan who owns CAL Insurance and Associates, an insurance brokerage with 28 employees and about $3 million in revenues. He wants to grow. Instead, he's laying off workers. One of his biggest challenges is just keeping up with new regulations; like mandatory paid sick leave for all employees in San Francisco. Yet when I asked him off camera about the $4.4 billion in tax hikes the Governor is proposing, he says, "Well, we're going to have to raise revenue somehow."

Governor Schwarzenegger agrees, proposing to close the budget gap with a nearly 50-50 mix of taxes and cuts, "as if you don't have your own problems" he told business owners. He said California's 3.6 million small businesses provide 52 percent of the jobs and "will lead us into recovery." How that will happen, especially with a higher tax burden, isn't clear. Some here are pushing to exempt small businesses from California's 10 percent capital gains tax. Good luck. As I've mentioned before, California's budget is heavily dependent on capital gains, which is why the state's fiscal health is currently such a mess.

Building" Entrepreneurs In Singapore

Gov. Schwarzenegger told the audience that he came to this country 40 years ago and quickly became a small businessman himself, first as a bricklayer, then starting a mail order business selling bodybuilding books. He says even now, in tough times, "the American Dream is alive."

But maybe the most inspirational moment came from Carl Schramm of the Kauffman Foundation, who was here to launch Global Entrepreneurship Week (everything launched in California has to include the word "global"). He says the credo of the Kauffman Foundation is to "teach people how to make a job, not how to take a job," and Schramm pointed to a survey which claims 75 percent of American university students have the goal of eventually working for themselves, whereas 75 percent of French university students have the goal of getting a government job.

Still, the Governor got the most laughs. Schwarzenegger has become a pretty good speaker. He even got a few laughs—and a few groans—when he poked fun at Democrats, pointing out that he's married to one, whom he promised to honor in sickness and in health. "Being a Democrat is a sickness," he said.

The video clip has highlights, including Schwarzenegger's comment that even in these tough times, "I don't see anyone in Florida escaping in their raft to Cuba."

Questions? Comments? Funny Stories? Email funnybusiness@cnbc.com

URL: http://www.cnbc.com/id/27803115/