California leaders fear remote culture could spur business outlets

SACRAMENTO – Tired Californians have traded their cramped, expensive apartments for affordable living in cheaper states for decades. Now, California companies are doing similar calculations after a months-long remote work experiment triggered by the pandemic.

Consecutive moves from headquarters of iconic Silicon Valley companies to Texas are raising new concerns about California’s position in the innovation economy. Business leaders fear that the successful move to remote work – and the ability for many jobs to be done from anywhere – will lift even more companies out of the notoriously high-cost state.

“This pandemic has really had a steroid effect on the ecosystem,” said Jim Wunderman, who heads the Bay Area Council, a business group that represents CEOs in the region. “I think we should recognize that we have a problem.”

California has long relied on its natural beauty and sunny climate, along with its concentration of venture capital, talent and prestigious research universities, to maintain its status as the world’s leading technology center. The state’s cultural diversity has long attracted some of the best talent in the world.

But there is more to the package: the country’s highest marginal income tax rate, uncontrolled housing costs – driven in part by an influx of well-paid technology workers – and extreme forest fires that have swept the state fiercely in recent years. Companies must also pay employees higher wages to live in California.

Such costs, associated with the pandemic, appear to have tipped the balance for established technology companies such as Oracle and Hewlett-Packard Enterprise, an IT company that split from HP during a corporate split in 2015. Both announced in December that they would move their headquarters to Texas, maintaining a presence in California and allowing many employees to remain there.

“We believe these changes better position Oracle for growth and give our people more flexibility about where and how they work,” the software giant wrote to shareholders this month, explaining its surprise decision to move its headquarters from the heart of Silicon Valley. to Austin, Texas.

Also this month, Bay Area cybersecurity company Tanium announced that it was moving to the Seattle area, allowing employees to “live where they want and work from there” Palantir, a co-founded data analysis company by billionaire investor Peter Thiel, moved its headquarters to Denver before going public this fall. Tesla CEO Elon Musk also said he is moving to Texas, where he is building a new factory; Tesla’s headquarters remain in Palo Alto.

At a Wall Street Journal event this month, the billionaire compared California to a winning team that becomes “complacent” and considers its success guaranteed. Musk will also avoid the state income tax by moving to Texas, given California’s progressive tax structure, which relies predominantly on better wages.

If enough wealthy entrepreneurs and well-paid jobs leave the state, the California budget may feel a squeeze. Nearly half of the state’s personal income tax revenue – 46% in 2018 – comes from 1% of California’s biggest earners, according to data from the state’s Franchise Tax Board. And about two-thirds of those dollars come from the top 5 percent.

The pandemic can accelerate the exits of companies and workers who have already considered a change, said David Shulman, senior economist at UCLA Anderson Forecast. He also predicts that more companies will allow their employees to live anywhere, even when it is considered safe to return to the workplace.

“Everything is at stake now because everyone is rethinking the location,” said Shulman.

Now, accounting, legal and real estate firms are being asked to help corporate clients in the Bay Area investigate whether and how to move, said Wunderman.

“This is a difficult state to do business in,” he said. “Is there a caution that the next shoe will certainly fall and which one will it be?”

In November, Californians rejected an electoral measure that would raise taxes on commercial property, revaluing them at market value. Separate proposals supported by labor, environmental and health groups aimed to create new “millionaire” taxes to increase funding for education and government services. None of the projects have progressed, but can be considered next year.

Despite all the talk of an exodus, the California budget has resisted the pandemic well thanks to continued gains among wealthy residents who remain here. The state’s nonpartisan Legislative Analyst’s Office reported this week that the income tax withholding actually exceeded 2019 in the nine months since the start of the pandemic closings, while projecting that the state will have an “unexpected revenue” of $ 26 billion in next 18 months.

Dee Dee Myers, communications strategist and former White House press secretary recently hired to lead Governor Gavin Newsom’s economic and business development office, says the California exodus narrative is overblown – as it was after the dot com, the Great Recession and other low points in the recent history of the state.

“This kind of wheezing, ‘Oh my God it’s over!’ As I said, we’ve seen this film before and it’s predictable, ”she said in an interview last week.

Days after the news from Oracle, your office tweeted a link to the new Fortune ratings of the fastest-growing companies, noting that eight of the top 25 are headquartered in California – including AppFolio, a cloud-based software company based in Santa Barbara.

But the recent changes have created enough distress for prominent technology leaders, such as Salesforce chief operating officer Bret Taylor, and Airbnb CEO Brian Chesky, to feel compelled to affirm their commitment to California.

“Yes, I spoke to @GavinNewsom about it,” Chesky tweeted after Oracle’s announcement. “Airbnb is going to be in California and I’m going to be in California. This is a special place. “

Taylor addressed the situation in a series of tweets in which he noted that “the tone of many outings bothered me” and that he was “excited to stay in the Bay Area”, where he was born.

“And I’ve never been more optimistic about the future of California,” he wrote.

Myers said the state will need to continue investing in areas like clean energy and higher education to maintain its advantage. But it is too early to know how the pandemic will change where people live and work in the long run, she said – or how many companies will continue with their policies that are totally remote permanently.

“We are not unaware of the challenges,” said Myers. But, she added, “I think anyone who thinks they know what the world is going to be like in three years is just making it up.”

For now, most California technology companies are resisting. The number of jobs in the innovation economy across the state grew between the second quarters of 2018 and 2020, according to an analysis by the Bureau of Labor Statistics employment and wage data by Ken Murphy, assistant professor at UC Merage School of Business Irvine.

But Washington, Utah and Florida created technology jobs at an even faster rate, Murphy said, and there is evidence that companies may be looking outside the state for lower cost alternatives and lower taxes. Counting each office and facility separately, he found a sharp increase in the number of “innovation outlets” in nine other states over the past two years, with the largest percentage increases in Arizona, Utah, Oregon and Texas.

Rental data suggests that workers have left the Bay Area in significant numbers, as the pandemic has freed many of their companies’ offices – and, in some cases, their children’s schools, which have remained entirely virtual since mid-March. Rents in the city of San Francisco have dropped nearly 14% since last year, according to data from real estate firm Zillow. Some people simply left for the suburbs, but the San Francisco and San Jose metropolitan areas also saw rents drop.

“The big question, really, is how permanent is this change?” said Cheryl Young, senior economist at Zillow.

The latest corporate announcements, Young said, may signal a more lasting change. “There is some movement outside California as the headquarters,” she said. “It is much more expensive here to have a home, so recruiting talent and paying for talent to move here costs more for the company.”

Another potential sign that California may be losing its magnetic attraction: state data released this month showed historically low population growth, a trend attributed in part to the pandemic. The state’s net emigration rate continues to rise and has not been offset by as many residents of other states and nations who have moved to California as in the past.

In the meantime, some business leaders publicly cast doubt on the California bargain.

“I think every responsible CEO should consider moving his company outside of California,” Tom Siebel, CEO of artificial intelligence software company C3.ai Inc., told Silicon Valley Business Journal this month on Redwood City. IPO of a company based on the company. “If you are not considering this, you will not be doing your job for your shareholders and employees.”