The High Cost Of Sunshine
Six years ago, Eric Loeffel, CEO of CompassLearning, decided he had had enough of the California Dream.
Tired of the Golden State’s taxes, regulations and the high cost of doing business and living in San Diego, he moved his educational software firm to Austin and hasn’t looked back.
“The move has worked out very well for us,” he said in a recent email interview. “The cost of the move was close to $2.5 million, but we were able to recover that investment in just over one year. Because of our lower tax burden, we have had between $5 million and $6 million that could be reinvested in the business that would have gone to taxes (in San Diego).”
Loeffel cited the following advantages Austin has over San Diego for his business: low taxes, fewer regulations, a deep tech talent pool, central location and more bang for the employees’ buck.
“The same salary that provided a software engineer the opportunity to rent a condominium or apartment in California allows that engineer to buy a 3-4 bedroom home, often with a large yard, here in Central Texas,” Loeffel wrote.
It’s called the sunshine tax. It’s not an actual tax on rays, but a reference to the high cost of just about everything in California: gas, housing, taxes and government regulation. And it’s substantial in San Diego.
A Small Business Friendliness study this year by the Kauffman Foundation and Thumbtack.com rated California among the five least-friendly states and San Diego among the worst cities. Nearly 70% of California business owners think it’s harder to do business in the Golden State than elsewhere, according to a survey released this year by the California Business Roundtable. The most commonly cited problems were taxes, government regulations/permits and business/property costs. Indeed, the nonprofit Tax Foundation ranked California 48th of 50 states on business tax climate for 2013.
A 2012 study by the Center for Housing Policy labeled San Diego County as the fifth-least affordable place to live for moderate-income families, who spend an average of 63% of their income on housing and transportation.
The tax burden affects high-income individuals as well as businesses. Beginning this year, Californians pay a combined 51.9% federal-state income tax on earnings over $1 million, the highest in the country and seemingly an incentive for successful entrepreneurs to relocate. However, a study last year by Stanford University found little relationship between taxes and where millionaires choose to live.
Sensing an opportunity, states such as Texas, Nevada and even Iowa openly recruit California companies, promising lower taxes and fewer regulations – and they get results.
So why do entrepreneurial businesses stay in California?
The late Duane Roth, CEO of CONNECT, San Diego’s largest startup organization, said the region’s pluses outweigh the minuses: “From the innovation standpoint, it’s all about talent and where the talent wants to live. And when you have 80 research institutes with all the concentrated MDs, engineers, PhDs, they just want to come and be part of that. And with that you really don’t have a choice; you can’t move it to Iowa where I grew up.”
That’s particularly true for businesses in genomics and digital medicine that find San Diego’s strength in wireless and biotech to be irresistible. Portable Genomics moved from Bordeaux, France, to San Diego in 2011, the same year BioNano Genomics relocated from Philadelphia.
“MY CEO is from Texas,” said Tim Tully, EVP of Dart NeuroScience, a pharmaceutical firm. “And I’ve come up with a method. Whenever he complains (about costs), I march in one of the scientists and have him or her tell him a story about the science going on (in San Diego) and then he’s OK for a while.”
“That infrastructure that California has is required for this type of innovation. You have to have the major universities and it’s sponsored by California, to a degree,” said Phil Layton, CEO of Pi Energy, a solar power startup.
The proximity to low-cost, skilled labor in Mexico is another lure. Former Wired editor Chris Anderson opened the headquarters of his new drone company, 3D Robotics, in San Diego to be close to his manufacturing plant across the border.
Taxes, regulations and cost of living were of little concern to a group of San Diego entrepreneurs at an ID8 Nation roundtable this winter.
“San Diego itself works really well. That it’s in California is a bit of a problem,” joked Lori J. Steele, CEO of Everyone Counts, an elections software firm.
However, the larger and more far-flung a California company becomes, the more likely it is to look to expand beyond the state, particularly with jobs that can be done elsewhere for less cost. For example, pet retailer giant PETCO recently opened a 400-job satellite support center in San Antonio and relocated some workers from headquarters in San Diego. PETCO officials cited a number of reasons for the move, including a lower cost of living, lower operational expenses and a more central location, as well as hefty financial incentives from Texas.
For many San Diego firms, the sunshine tax is just a part of doing business, said David Warren, CEO of Liberated Intelligence, a sales software firm.
“It is what we live in and no matter who wins the election the next day I’m going to do the same thing I was going to do either way,” he said. “I’m going to go out, I’m going to innovate, I’m going to find customers, find capital, go do my job, be who I am because that’s the role we play in the marketplace. Is Sacramento malicious or just stupid? I don’t know. Doesn’t matter.”