California leaders fear remote culture could fuel business departures

Tech company departures to lower-cost states during the pandemic stoke worries about companies moving elsewhere.

SACRAMENTO — Fed-up Californians have been trading their cramped, pricey apartments for affordable living in cheaper states for decades. Now, California’s businesses are making similar calculations after a monthslong remote work experiment triggered by the pandemic.

Back-to-back moves of iconic Silicon Valley firms' headquarters to Texas are raising fresh concerns about California's standing in the innovation economy. Business leaders worry that the successful shift to remote work — and the ability of many jobs to be performed from anywhere — will drive yet more companies out of the notoriously high-cost state.

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

California has long counted 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 premier tech hub. The state's cultural diversity has long drawn some of the world's best talent.

But there is more to the package: the nation's highest top marginal income tax rate, runaway housing costs — driven in part by an influx of well-paid tech workers — and extreme wildfires that have swept the state with ferocity in recent years. Companies also must pay employees higher wages to live in California.

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

“We believe these moves best position Oracle for growth and provide our personnel with 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 the Silicon Valley to Austin, Texas.

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

At a Wall Street Journal event this month, the billionaire compared California to a winning team that grows “complacent” and takes its success for granted. Musk will also avoid state income taxes by decamping to Texas, given California's progressive tax structure that relies overwhelmingly on top earners.

If enough wealthy businesspeople and high-paying jobs leave the state, California's budget could feel the pinch. Nearly half of the state's personal income tax revenue — 46 percent in 2018 — comes from California's top 1 percent of earners, according to data from the state Franchise Tax Board. And about two-thirds of those dollars come from the top 5 percent.

The pandemic could accelerate departures among companies and workers that have already mulled a move, said David Shulman, a senior economist at the UCLA Anderson Forecast. He also predicts that more firms will allow their employees to live anywhere, even when it’s deemed safe to return to the workplace.

“Everything’s up for grabs right now because everybody’s rethinking location,” Shulman said.

Accounting, legal and real estate firms are now being asked to help corporate clients in the Bay Area investigate whether and how to relocate, Wunderman said.

“This is a tough state to do business in,” he said. “There’s a wariness that the next shoe will certainly drop and what will it be?”

Californians in November rejected a ballot measure that would have hiked taxes on commercial properties by reassessing them at market value. Separate proposals backed by labor, environmental and health care groups aimed to create new "millionaire" taxes to increase funding for education and government services. Neither bill advanced, but they may be considered next year.

For all of the talk of an exodus, California's budget has weathered the pandemic well thanks to continued gains among affluent residents who remain here. The state's nonpartisan Legislative Analyst's Office reported this week that income tax withholding has actually outpaced 2019 over the nine months since pandemic closures began while it projects the state will have a $26 billion "windfall" over the next 18 months.

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

“This kind of breathless, 'Oh my God it’s over!' Like I said, we’ve seen this movie before and it’s predictable,” she said in an interview last week.

Days after the Oracle news broke, her office tweeted a link to Fortune’s new rankings of the fastest-growing companies, noting that eight of the top 25 are based in California — including top-ranked AppFolio, a cloud-based software company headquartered in Santa Barbara.

But the recent moves created enough angst that prominent tech leaders like Salesforce Chief Operating Officer Bret Taylor and Airbnb CEO Brian Chesky felt compelled to affirm their commitment to California.

“Yes, I spoke to @GavinNewsom about this,” Chesky tweeted after the Oracle announcement. “Airbnb is staying in California and I’m staying 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 leaving has bothered me” and that he was “excited to stay in the Bay Area,” where he was born.

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

Myers said the state will need to keep investing in areas such as clean energy and higher education to keep its edge. But it’s too soon to know how the pandemic will change where people live and work in the long run, she said — or how many businesses will continue their fully-remote policies permanently.

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

For now, most tech companies in California are sticking it out. The number of innovation-economy jobs statewide grew between the second quarters of 2018 and 2020, according to an analysis of Bureau of Labor Statistics employment and wage data by Ken Murphy, an assistant professor at UC Irvine’s Merage School of Business.

But Washington, Utah and Florida have added tech jobs at an even faster rate, Murphy said, and there is evidence that firms may be looking outside of the state for lower-cost, lower-tax alternatives. Counting each office and facility separately, he found a sharper uptick in the number of “innovation establishments” in nine other states during 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 untethered many from their company offices — and, in some cases, from their children’s schools, which have remained fully virtual since mid-March. Rents in the city of San Francisco have fallen by nearly 14 percent since last year, according to data from the real-estate firm Zillow. Some people have simply left for the suburbs, but the metro areas in San Francisco and San Jose have also seen rents soften.

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

The latest corporate announcements, Young said, could signal a more lasting shift. “There is some movement away from California as a central headquarters,” she said. “It’s much more expensive here to own a home, so recruiting talent and paying talent to move here does cost a company more.”

Another potential sign that California may be losing its magnetic pull: State data released this month showed historically low population growth, a trend attributed partly to the pandemic. The state's net outmigration rate continues to climb and has not been offset by as many residents from other states and nations moving to California as in the past.

Meanwhile, some business leaders are publicly casting doubt on the California bargain.

“I think every responsible chief executive officer has to consider moving their company out of California," Tom Siebel, CEO of the artificial intelligence software company C3.ai Inc., told the Silicon Valley Business Journal this month on the day of the Redwood City-based company’s IPO. "If you're not considering that, you're not fulfilling your job for your shareholders and your employees.”