The Top 3 States Where California Companies are Relocating Their Headquarters

Another high-profile company recently announced its relocation from Silicon Valley to Austin. Once Austin was awarded Tesla’s investment of a Gigafactory and 5,000 jobs, it was not too remarkable to learn of the company’s relocation of its headquarters from California to Texas. As compared to all 50 states, California continues to have one of the highest, if not the highest, costs for utilities, taxes, and labor. So, the exodus of California-based companies to more business-friendly environments should come as no surprise.

265 companies relocated their headquarters from California since 2018

The Hoover Institution reported that 265 headquarters have relocated from California between 2018 and June 2021. Perhaps most intriguing is that the rate of relocations announced during the first half of 2021 alone is already double the rate of 2020. Companies continue to relocate primarily to Texas, which claims 114 of the reported headquarters relocations. Historically, Arizona and Nevada would be the next to benefit from such relocations, but recently Tennessee has risen to the top as the recipient of 25 relocations and Arizona is next with 17.

Comparing tax conditions of California, Texas, Tennessee, and Arizona

As shown below, California ranks 49^th on the State Business Tax Climate Index, sandwiched between New York and New Jersey at dead last on the overall rankings. The table below compares various key state and local tax components associated with these four states:

State Business Tax Climate Index (2021)

Source: Tax Foundation

Comparison of critical site selection factors

In addition to a high tax environment, California has higher labor costs, a higher cost of living, a greater percentage of labor union affiliations, and higher utility costs as compared to states winning headquarter relocations. The following table compares these site selection factors:

States improving their tax climate through new and expiring legislation

While taxes may only tell one part of the story, other states are improving their tax climate to remain competitive for existing and new business opportunities.

Last year, Arizona approved Proposition 208 to help fund education by imposing a 3.5% surcharge on single filers earning over $250,000 and married persons filing jointly and earning over $500,000.

To combat increasing individual income taxes and to remain competitive with states which do not impose individual income taxes, such as Texas and Tennessee, Arizona Gov. Doug Ducey signed into law a measure that imposes a flat rate of 2.5% over several years and caps liability to a total of 4.5%.

In addition, Arizona reduced its commercial and industrial property tax assessment ratio from 18% to 16% over the next three years, which will reduce companies’ property tax burden associated with business personal property.

Tennessee historically only imposed a personal income tax on income derived from stocks and bonds, but that provision expired January 1, 2021, and thus Tennessee, like Texas, has no personal income tax.

Economic incentives can bridge the gap

A state’s tax and business environment are paramount when companies consider where to locate. However, once those factors are evaluated, economic incentives tend to influence decision-makers by bridging cost gaps.

The irony is that California is generally not aggressive in terms of offering economic incentives, despite all of the data cited above showing that it has a much higher cost of doing business. California’s primary current economic incentives are:

• California Competes Tax Credit
• Research & Development Tax Credit
• Partial Sales & Use Tax Exemption
• Training Incentives
• Economic Development Rate Program
• New Employment Credit

The issue with most of these programs is that they are narrowly defined. For example, the California Competes Tax Credit is discretionary and nonrefundable, and nontransferable, so if a company does not have a state income tax liability, then this credit is not realizable to them.

The New Employment Credit is dependent upon geography, such as a high unemployment area. There is only a partial sales tax exemption for manufacturing equipment while most other states statutorily exempt manufacturing machinery and equipment used in the manufacturing process.

Perhaps to try to become more competitive, California recently created the California Competes Grant (CalCompetes Grant) which is funded at $120 million for the 2022 fiscal year. This grant is for new business, as well as for retention efforts, with a maximum award of $36 million. To be eligible a company must meet at least one of the following criteria:

• Create at least 500 new full-time jobs in California;
• Make capital investments of at least $10 million; or
• The project will take place in an area of high unemployment and/or poverty as defined in the California Competes Tax Credit regulations

The evaluation factors will be like the California Competes Tax Credit, but an award is at the discretion of the Governor’s Office of Business and Economic Development (GO-Biz) on a competitive basis. Additional rules, regulations, and procedures will likely be promulgated in November.

Conclusions

While this blog mainly focuses on the surprising number of headquarter relocations out of California, there are so many other non-headquarter-related projects across all industries that are relocating or expanding elsewhere.

The effect of California’s tax and the business atmosphere is not only taking its toll on professional service roles, but also on manufacturing and industrial projects.

California really must continue to re-evaluate its tax and business structure and create impactful economic incentive programs to stop the exodus.

In addition, states benefiting from such exodus need to continue to maintain a favorable tax and regulatory environment while proactively managing the potential growing pains – transportation, housing costs, and availability of utilities.

For additional information, please contact me at krendziperis@siteselectiongroup.com with any questions.