Finance&Economics, stock

Why rich people leaving California isn’t what you think

In case you missed it, San Francisco canceled Abraham Lincoln.

Yes, last week the San Francisco School board voted 6-1 to remove Lincoln’s and dozens of other historical names (see the board’s spreadsheet here) that committed transgressions from public schools, in this case, Abraham Lincoln High School.

Sounds crazy, I know, but it turns out there’s actually something to this.

Lincoln, the school board determined, pursued policies that “were detrimental to American Indian Nations and Native peoples,” including a mass hanging of 38 members of the Sioux tribe. I didn’t know anything about this so I started reading about Lincoln, his administration and American Indians and frankly it was pretty shocking.

Having said that, and with deep respect to Native Americans, I don’t agree with stripping Lincoln’s name from the school. I understand the move would call attention to our nation’s horrific treatment of American Indians, but taking Lincoln’s name down would mitigate Lincoln’s great achievement of ending slavery. Calling attention to this stain on Lincoln’s legacy is fine, (and students should study it) but renaming a school because of it doesn’t make sense.

To many Californians of a certain stripe—those with a Tesla in the driveway and a Peloton in the den—this Lincoln controversy is one more sign that their home state has gone around the bend, and that they should pack up and leave. For others, the Lincoln story is actually a validation because as you have likely heard, millionaires and billionaires have fled California in droves, and they’ve taken their companies with them.

I’ve wondered though, to what degree is this just the usual California-rich-people-bellyaching thing, (akin to tech celebrity Chamath Palipatiya and others trying to recall Governor Gavin Newsom) or if there’s something more consequential going on right now. And if so, why?

As it turns out, and like the Lincoln case, the answers aren’t so simple.

First, yes of course it’s true that many high-profile Californians and companies have left and/or have announced they will be leaving—mostly from the Bay Area and to the likes of Texas, Florida and Colorado—including Elon Musk and Tesla (TSLA), Larry Ellison and Oracle (ORCL), Palantir (PLTR) and co-founder Joe Lonsdale, Hewlett-Packard Enterprises (HPE) and Charles Schwab (SCHW), to name some of the biggies. More high-profile moves are said to be on the way. (We’ll get to one individual a bit later.)

Beyond the heavy-hitters, a number of other lower-profile, but key players have also left, such as the highly influential Stanford computer scientist, David Cheriton, billionaire PeopleSoft and Workday co-founder, David Duffield (who’s had his battles with California tax authorities), and media-personality-of-the-moment Joe Rogan. And ordinary folks in tech and other businesses have moved too, which Nellie Bowles chronicled nicely in the New York Times.)

OAKLAND, CA - MAY 01:  Larry Ellison, the chief executive officer of Oracle Corporation, watches the Golden State Warriors play against the Los Angeles Clippers in Game Six of the Western Conference Quarterfinals during the 2014 NBA Playoffs at ORACLE Arena on May 1, 2014 in Oakland, California.

Why they’re leaving has been the subject of millions of news stories, podcasts, documentaries, Twitter rants and public hearings. Namely: Taxes, onerous regulations, the high cost of salaries, rent, insurance, and real estate, as well as perceived political correctness, an alleged lack of work ethic, the homeless problem in San Francisco, the wildfires, and finally, the prospect of even more taxes.

Adding to that, remote work during COVID-19 has demonstrated that anyone who works by a computer and phone can do so from anywhere. Further, the pandemic coincided with and accelerated an explosion of cloud services, and fostered the adoption of products and tools like Zoom (ZM), Slack (WORK) and Clubhouse.

In a way, Silicon Valley has created technology that is obviating itself.

All this has given Bay Area denizens permission to pack up their wine cellars and their $10,000 hand-painted Italian bicycles and go. But is this urge to leave the Golden State really new, or is it just another chapter of a much older story?

“I just left last month,” says Jim Davidson, co-founder and former CEO of the giant private equity tech firm Silver Lake Partners, who moved to Montana where he’s had a vacation home for 20 years. “There’s a lot of people who think it’s different this time. And there’s a lot of politicians who think it’s not. I don’t know if it’s different this time or not. But it feels like it.”

More on Davidson’s musing in a moment, but first I should point out that disillusionment and apocalyptic visions are nothing new when it comes to California. Exhibit A might be Joan Didion’s chilling takedown of San Francisco, “Slouching Towards Bethlehem,” written 53 years ago. (Another favorite of this genre: the work of Jello Biafra, lead singer of the “Dead Kennedys” who penned the punk anthem “California Über Alles,” then ran for mayor of San Francisco in 1979—his platform included forcing businessmen to wear clown suits within city limits—finishing third in a 10-person race won by, guess who, Dianne Feinstein.)

In short, California and San Francisco in particular, has always been off-kilter and difficult, but at the same time remarkable and inspiring. (Maybe what’s different now is just that there’s more money.)

There’s a camp that downplays this recent exodus, arguing for one thing, that there are no hard numbers to measure the scale or import of people leaving.

“I feel like it’s too early to know, and anybody who claims they know for sure is doing that based purely on anecdote,” says Molly Turner, a professor at UC Berkeley’s Haas School of Business focused on tech and urban policy, who co-hosts the podcast “Technopolis.” “My gut tells me it’s mostly just a couple of loud people leaving and throwing a tantrum on the way out. I don’t think it will have a significant impact on the Bay Area as the global center of the tech industry.”

OK, that’s the gut, but what does a moving guy say? “Typically in years past [moving jobs have] been about 50% outbound, 50% inbound,” says Steve Komorouswho since 1988 has co-owned King Relocation Services, a moving agency in Los Angeles, California. “In 2020, it was 59% outbound, 41% inbound.”

Is that imbalance the biggest Komorous has ever seen? “I think that’s going too far,” he says. “I’ve been in this business since 1982. There have been big, funky years. This cycle of the mad dash leaving California, that will subside. It may take another year or so. It’s just a cycle.”

In fact people have become fed up and left California for decades. 3Com founder, legendary technologist and “Father of the Ethernet,” Bob Metcalfe exited Silicon Valley in the early 1990s and ended up in Maine.

FILE - In this April 18, 2020, file photo, tents line a sidewalk on Golden Gate Avenue in San Francisco. Moving to address income inequality on a local level, San Francisco voters passed several tax measures including one that would impose additional tax on companies whose CEOs earn far higher than their average workers. (AP Photo/Jeff Chiu, File)

Jim Clark, founder of Silicon Graphics and co-founder of Netscape, decamped in 1999. “I had these huge gains after the AOL Time Warner merger [AOL had bought Netscape],” Clark tells me, “and I was thinking of moving to Monaco but that wasn’t going to work. Then I went to Florida and bought a house over the weekend and began to sell my stock.” And did he ever. Clark bought one of the biggest houses in Palm Beach. (I beg you to take a peak.)

Another point, many companies leaving nowadays aren’t exactly highfliers. They’re mature businesses growing through price increases, cost cutting, outsourcing or by buying smaller companies rather than through innovating. “The Bay Area still has Google, Apple, Facebook, Salesforce, Genentech, Airbnb, Twilio, etc.,” says Turner of Berkeley. “The biggest tech companies in the world are still headquartered here and expanding here.” (Plus, there’s Turner’s university and Stanford.)

Dee Dee Myers, former press secretary for former President Bill Clinton, hired in December to head Gov. Gavin Newsom’s business and economic development office, agrees the exodus is overstated, but with some caveats. “Every few years, somebody writes ‘California is over,’ ‘Silicon Valley is over,’ ‘the tech boom is over,’ — there’s always some reason,” she says. “It always ends up not being true. There are too many big pieces in place here that make this a big place to live and do business.” But she adds, “The cost of living is high. There are some challenges to being in a place where a lot of people want to live. We need to continue to try to address the challenges that come with the incredible assets we have. We can’t rest on our laurels.”

That’s for sure because that aforementioned laundry list of issues is very real. You could write a book about each one: fires, homelessness, and what people consider political correctness. (“You hear that teachers are teaching our kids that we’re evil,” a Silicon Valley executive told me.)

But let’s just drill down and take a quick look at taxes in California because they are eye-popping. First, California has the highest marginal tax rate in the country, 13.3% for income over $1 million. Not surprisingly then, it’s estimated that California’s top 1% of income earners already pay most of the state’s personal income tax revenue, some 46%. (These are ultra-rich people mind you.) On the other hand Proposition 13, (passed in 1978, remember “I’m Mad as Hell”?) caps property taxes: “Annual valuation increases for locally assessed property are capped at the lesser of the inflation rate or 2%, and the tax rate cannot exceed 1% of the property’s assessed value,” according to KPMG.

Then there are proposed taxes, like a corporate tax which would fund solutions for homelessness. And another so-called “Hotel California” tax, where any person who stayed in the state for more than 60 days in a year would be subject to California tax for the next decade. (Get it? “You can check out anytime you like, but you can never leave.”) And now a new bill calls for hiking the top rate to 16.8% and adding a 0.4% wealth tax (which if approved would be the nation’s first.) The wealth tax would be levied “on all net worth above $30 million,” and would apply to some 30,400 residents and raise $7.5 billion,” the bill’s authors say.

(Also remember thanks to Donald Trump’s tax reform which targeted high-tax blue states, read California and New York, state and local tax deductions are capped at $10,000.)

Myers says talk of new taxes is just that. Talk. “The governor has no intention of raising personal income rates or creating some kind of wealth tax,” she says. “[He’s] not interested in increasing corporate taxes. It’s not going to happen.”

Lisa Kreyer holds up a sign during a protest by hair salon owners and workers against the latest lockdown orders outside the offices of Marin County Health Officer Dr. Matt Willis Thursday, Dec. 10, 2020, in San Rafael, Calif. California health officials are urging the state's residents to stay home as much as possible due to a coronavirus surge taxing the state's hospitals. But the most recent stay-at-home order allows some businesses to remain open, frustrating shuttered business owners who say officials keep sending mixed messages. (AP Photo/Eric Risberg)

For those Californians who want to move to avoid taxes, they better really mean it. Tax experts point to a lengthy checklist in order to prove you no longer really live in California, including which state issues your driver’s license, and where your dentist is located.

“I am concerned for California,” says Sandy Murray, a partner and private client services co-leader at the San Francisco accounting firm BPM, who’s done accounting for wealthy people in California for more than 30 years. “More people have left in the past six months than ever in my career. It’s always been a theoretical conversation for clients—should I break domicile? Now it’s become an actionable conversation. I see a snowball effect. When one guy moves and talks about it, then I get a call from three colleagues at the same company. If only a small percentage of those folks move, it’s a huge tax base that moves.”

I understand people complaining about huge taxes, but the fortunes are pretty huge too. And more millionaires, never mind billionaires, are minted in California every quarter. Even No. 438 on the Bloomberg rich list, software CEO Tom Siebel, is worth a cool $6 billion. Speaking of Siebel, he recently spoke to our subject:

“I think every responsible chief executive officer has to consider moving their company out of California,” Siebel told the Silicon Valley Business Journal recently. “My family is here and I love California so, for now, we’re here. But there’s not a dinner party that I go to where I see yet another job creator—some of them among the greatest job creators in history—leaving the state and taking their employees with them.”

What will it take to stem the exodus? “You are going to have to have a business-friendly environment with a reasonable tax structure,” Siebel said.

Speaking of high profile people possibly leaving California, a knowledgeable source told me Marc Andreessen—Silicon Valley’s alpha male venture capitalist—is making noises about moving to Miami. When I emailed Andreessen to see if that was the case, I got back: “No word on Marc leaving CA.,” from Andreessen’s spokesperson.

Andreessen has deep ties to Silicon Valley through his investments and through his wife, Laura Arrillaga, who’s from Palo Alto, (her father, John Arrillaga, retired now, was one of the largest property developers in Silicon Valley.) Still, Andreessen may want to emulate his old Netscape running mate, Jim Clark, and move to Florida as he sells some of those big gains he’s made over the years.

And then there’s the political environment which Andreessen addressed back in 2017 when he said, “Silicon Valley is extremely left-wing, extremely liberal.” You wonder if our partisan environment has been bringing out their inner more Libertian (dare I say neocon) in the likes of Andreessen, Larry Ellison and Elon Musk. It’s also a fact that as people get older and richer they often get more conservative.

As for their destinations, “it’s abundantly clear most of these tech executives who are leaving for other cities are in for a rude awakening,” says Turner of Berkeley. “They don’t know anything about the politics in these other cities. San Francisco may not have been as poorly managed as they thought it was.”

On that note, let’s check back in with one of our first movers, Jim Clark. Turns out that after a decade in Florida, Clark moved again. “I lived in Miami for 10 years. I got remarried. Once we had kids, I didn’t want them growing up in redneck Florida,” he says. Ah that.

Clark actually tried California again briefly, buying “an ordinary” $40 million home in Atherton. How did that work out? “It’s not the same anymore,” Clark says. “It was during the height of the unicorn thing and everyone thought they walked on water and were pitching me things like I was a gullible.” So Clark ultimately settled in New York City, establishing an irrevocable trust as a tax shelter.

Would he ever go back to California? “No,” he says. “There’s climate change, plus Facebook, Apple and Google have made everything so crowded and expensive, the real estate situation is out of control. And I’m a Democrat, but the Democrats there don’t fully get it. I love New York, but I do miss the technology conversations of the Bay Area.”

Lessons? How about some oldies but goodies. To wit: “The grass is always greener on the other side of the fence.” And, “you can’t have your cake and eat it too.”

Bottom line is yes, some more tech moguls and their companies will leave California, which as it turns out will be that state’s loss but America’s gain. “The silver lining is it’s probably going to distribute tech jobs to more cities across the country,” notes Turner of Berkeley. Sure Austin will become a big time tech hub and Seattle already is, but the Bay Area will remain the center of the nation’s tech industry. Like Myers says, there’s just too much going on there for it to be over. Having said that, California does need to get its act together.

A few days ago, I was delighted to stumble across a Time Magazine interview with none other than Joan Didion, now 86, who has a new collection of essays. The interview was, well, perfect:

Q: Do you fear death?

A: No. Well, yes, of course.

Q: Do you have hope?

A: Hope for what? Not particularly, no.

I had to laugh. And then I wondered: Does Joan Didion still live in California?

In fact no.

She left in 1988 and moved to New York.

Though she still goes back and forth.

And maintains a California driver’s license.