The news out of Silicon Valley is that some of America’s most dynamic businesses are pulling up stakes and leaving. Hewlett Packard Enterprise, the firm started by Bill Hewlett and David Packard in a Palo Alto garage in 1939, is moving its headquarters to Houston, Texas, and the software giant Oracle has already relocated its headquarters from Redwood City, California, to Austin, Texas.
Likewise, Elon Musk, the CEO of Tesla and SpaceX, has announced that he, too, is moving to Texas, as is Joe Lonsdale, the founder of the data-analytics company Palantir, who is bringing his entire venture-capital firm, 8VC, along with him. Lonsdale is so disenchanted with the Golden State that he announced his move publicly in an op-ed for the Wall Street Journal headlined “California, Love It and Leave It.”
Of course, many economic observers had noticed this exodus long before it became a stampede. The talks I give for supporters of Stanford University’s Hoover Institution all used to be held in California, whereas now I find myself often traveling to Dallas or other cities, because that’s where many people have gone.
There are plausible explanations for these moves, with an obvious one being high state-level taxes. The top personal income-tax rate levied by the state of California is 13.3%, and 8% for taxable income between $45,753 and $57,824 (for single filers). In contrast, Texas has no personal income tax. Similarly, whereas California’s corporate tax rate is 8.84%, Texas has no corporate tax, opting instead to charge a franchise tax of around 1%, on average (based on gross receipts). Finally, California has a 7.25% state sales tax, compared to Texas’s 6.25% rate.
Moreover, while California’s average effective property tax rate is lower than that in Texas, its housing prices more than offset the difference. The average property tax rate with parcel taxes and fees reaches about 1% in California, and about 1.9% in Texas. But with house prices in California averaging approximately $450,000, the average property tax is in the range of $4,500 per year, compared to less than $2,800 in Texas, where house prices average roughly $146,000.
Regulatory differences also factor into location decisions. According to the Pacific Research Institute, California has the second-highest regulatory burden on employment of all 50 states. The ranking is based on a composite score of seven labor regulatory categories: worker compensation, occupational licensing, the minimum wage, lack of right-to-work laws, mandatory medical benefits, unemployment insurance, and short-term disability regulations. Each regulation – even hidden ones like occupational licensing – creates compliance costs, the burden of which is relatively greater for small start-ups.
There are also big differences in regulations that restrict how land may be used for residential, commercial, or recreational purposes. Specifically, land-use regulations (which are often determined by city or county governments) prevent or restrict housing construction and thereby make housing more expensive. Published research by economists Kyle Herkenhoff, Lee Ohanian, and Edward Prescott shows that California has one of the most restrictive set of land-use regulations in the country, whereas “Texas has the lowest level of land-use regulations.”