A Blog by Jonathan Low

 

Dec 5, 2020

The Reason Tech Execs Are Leaving the Bay Area For Places Like...Texas

Elon Musk is merely the latest wealthy tech exec who has publicly flirted with the notion of moving from California to Texas. 

Taxes are increasingly an issue, specifically, taxation of capital gains, which are significant for tech and are treated more favorably in a number of states like Texas than they are in California. JL

Cory Weinberg and colleagues report in The Information:

Evidence that the Bay Area might be starting to lose its grip as the tech industry’s power center: available office space doubled this year, while monthly apartment rents dropped 21%. High housing costs have frustrated residents (but) some are leaving California because of the state’s high taxes. Many tech executives earn the bulk of compensation through stock grants, whose capital gains are taxed as income in California. Texas and Florida have no state income taxes. Employees consider following (because) “Proximity to power is always relevant to the workplace."

Splunk, Dropbox and Brex followed similar formulas as they grew from small startups to established companies. To attract employees and customers, each set up elaborate San Francisco offices and plastered billboards for its services around the city. Dropbox three years ago leased a giant new office building on the city’s eastern edge. Fintech firm Brex even opened its own cafe in a neighborhood popular with venture capitalists.

Now, all three companies embody a new trend: Their chief executives are leaving the Bay Area. Dropbox CEO Drew Houston and Splunk CEO Douglas Merritt both recently bought homes in Austin, with plans to make the Texas capital their permanent residences, they have told people at their firms. Brex’s 20-something co-founders, Henrique Dubugras and Pedro Franceschi, have decamped to Los Angeles and don’t plan to renew the company’s San Francisco office lease next year, they told The Information. None of the moves has been previously reported.

THE TAKEAWAY
• CEOs of Dropbox, Brex, Splunk among those moving out of Bay Area
• Departures follow shift by companies to allow remote work
• Moves could affect employee decisions about where to live

The executives’ departures follow announcements by the companies that they will embrace remote work, meaning many employees won’t have to work in offices even after the Covid-19 pandemic ends. But employees are closely watching their bosses’ decisions. At Splunk, some employees already have asked executives whether they should move to Austin, too.

As CEOs move away, it could have a significant impact on where their current and future employees live, said Dan Harvey, vice chairman of the Bay Area for real estate services firm CBRE, whose clients include Salesforce, San Francisco’s largest office tenant. “Proximity to power is always very relevant to where the workplace ultimately is and how it scales,” he said.

The moves are the latest evidence that the Bay Area might be starting to lose its grip as the tech industry’s power center. Articles about people leaving San Francisco have circulated on Twitter and private messaging threads. Some of the city’s detractors have reveled in the apparent exodus, even if it is too soon to know its extent. But some signs are clear: The amount of available office space in the city doubled this year, according to CBRE, while monthly apartment rents dropped 21% year over year, according to Zumper.

Beach Weekends, Lower Taxes

Brex co-founder Dubugras told The Information that places like Austin, Park City, Utah, and Incline Village along Lake Tahoe’s Nevada shoreline are becoming increasingly popular for tech executives. He said he and his co-founder chose Los Angeles so they could still be close to San Francisco to fly back for meetings, but could enjoy a better lifestyle and go to the beach on weekends.

But some others are leaving California entirely, in part because of the state’s high taxes. Many tech executives earn the bulk of their compensation through stock grants, whose capital gains are taxed as regular income in California, said Dan Schrauth, a managing director at J.P. Morgan Private Bank who serves high net worth clients in the Bay Area. The top tax rate is 13.3%. Nearby Washington and Nevada, as well as popular destinations like Texas, Wyoming and Florida, have no state income taxes and don’t tax capital gains.

Expectations that California will raise income taxes or impose a wealth tax to make up for budget shortfalls has prompted some J.P. Morgan clients to consider leaving the state, said Schrauth. “That freaks people out,” he said.

Houston, a 37-year-old Massachusetts native who became a billionaire after taking Dropbox public in 2018, owns a condo in a glass-walled downtown San Francisco tower. Like other tech executives, including Facebook CEO Mark Zuckerberg, he has spent time in Hawaii during the pandemic. Houston told associates he plans to make Austin his permanent residence after buying a house there recently. The company announced last month that it would make remote work standard practice for all its workers, instructing employees to use offices only for collaborative work once it is safe to do so. Houston, through a spokesperson, declined to comment.

Splunk’s Merritt, who has led the 17-year-old publicly traded software firm since 2015, has told employees he still plans to travel to the Bay Area and other places around the country frequently to meet with customers. Austin’s location in the middle of the country is convenient for him, he said. The company plans to allow more of its staff to work remotely.

“If we’re going to encourage our employees to have flexibility to work where they want, I want our executives to mirror that and model that as well,” said Kristen Robinson, Splunk’s chief people officer, in an interview.

Many tech executives and employees have a complicated relationship with San Francisco, one of the most politically progressive cities in the country, which has struggled to channel its stream of corporate taxes into visible quality-of-life improvements. The city’s politicians and voters, meanwhile, have at times pushed back against the industry’s growth. This month, voters approved a tax increase on tech firms and a new tax on companies with highly paid CEOs.

Some tech executives, venture capitalists and high-level employees are using the pandemic period to reflect on the negative aspects of work and life in the city, where frequent car break-ins, open-air drug use, high taxes and high housing costs have frustrated residents of California’s wealthiest city. Toby Scammell, CEO of marketing software firm Womply, said in an email that he established the company’s new headquarters in Lehi, Utah, this year after its office in San Francisco’s South of Market neighborhood was broken into several times.

At security software firm Tanium, about a quarter of employees based in its Emeryville office near San Francisco have relocated out of the region since March, said CEO Orion Hindawi. He recently moved to Seattle himself. “I’m not optimistic about the next five years in San Francisco,” Hindawi said. “I was watching my people vote with their feet. As soon as I gave them freedom [to leave], they fled.”

Blake Taylor, who owns one of Austin’s top realty firms, said he knows of a few dozen potential buyers looking at homes that cost $10 million or more, three times as many as usual. “It’s the strongest we’ve ever seen,” he said. The tax savings “pays a really nice mortgage on a really nice house,” he said.

New residents to Austin also include Joe Lonsdale, co-founder of Palantir and head of investment firm 8VC, who lived in the tony San Francisco suburb of Woodside. J.D. Ross, a co-founder of Opendoor who is now a general partner at VC firm Atomic, recently moved to Austin from San Francisco. Keith Rabois, a general partner at Founders Fund who invested in several firms going public this year, recently told Fortune he was moving to Miami from San Francisco in part because in his view the California city is mismanaged. “It’s impossible to stay here,” he said.

The attitude of those leaving the city irks others in San Francisco’s tech community. Molly Turner, a former Airbnb executive who teaches urban policy at University of California, Berkeley, said she has watched many tech investors and executives avoid getting involved in city politics or public service. “I don’t want to hear you critique our government on the way out the door if you haven’t done anything to try to fix it,”  she said.

Unexpected Tax Revenue

It isn’t clear whether departures by executives and investors will have a negative impact on state or city coffers. Personal income taxes are the state’s most important revenue stream, in part because it has relatively low property taxes. Swings in income tax revenue have historically led to boom-and-bust cycles for the state. A state report last week, however, said total collections from income, corporate and sales taxes rose 9% between August and October compared with the previous year, a better-than-anticipated showing.

Bay Area cities have seen some of the steepest declines in new job postings recently, said Jed Kolko, chief economist at job search site Indeed.com. But that’s because the region has a high proportion of tech jobs that can be done remotely. That has hurt retailers and restaurants, which in turn have stopped hiring. He said that historically, lower and middle income residents are more likely to leave California than the wealthy because of high housing costs.

“Some moves [tech employees] are making now will turn out to be temporary,” he said. If some workers leave, he added, it could open the door for other types of businesses to flourish. “It’s more likely the city will change than dramatically shrink.”

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