By now, most have heard of several high-profile people and companies moving from California and New York to Texas. Prior to the pandemic, Texas was already experiencing a boom in both population and economic activity. Numerous companies such as Apple and Google already had plans to set up offices that would employ hundreds in up-and-coming cities such as Austin.
The pandemic accelerated this shift as work from home allowed people to escape the high-cost cities along the coasts to the numerous large cities in Texas such as Houston, Dallas, Austin, and San Antonio. Notable companies such as HP and Oracle recently announced they’d move their Silicon Valley headquarters to Houston and Austin, respectively. Notable people such as Joe Rogan and Elon Musk have publicly announced their move from California.
The Lone Star State’s Benefits
One reason people are flocking to Texas is because of no income tax and relatively lower cost of living compared to the high-cost states they were fleeing. California’s income tax rate is 13.3% while New York’s is 8.82%. In addition, the median home price in California is $712,430 and even higher in the Bay Area at $1.1 million, and in New York at $660,000. This is why high-income earners, in particular, can save tens of thousands of dollars a year. This is an especially large amount for many families, as even the upper-middle class are finding it harder to make ends meet.
Another reason is the role the government plays in businesses in Texas compared to California. California has a lot more rules and regulations that are directed towards protecting the environment. This makes the cost of doing business cost a great deal of money. Texas has fewer regulations. As a result, housing and business projects can be completed faster with fewer hoops to jump through and fewer costs. This, combined with lower costs of housing, makes real estate cheaper, especially for the middle class and younger buyers.
Future of Texas
With tech companies from California flocking to Texas, and banks such as PNC recently purchasing BBVA, a bank with 336 branches in Texas, roughly 50% of the bank’s entire branch operation, big companies are now focusing on capturing future growth expected in Texas. With these shifts beginning to accelerate, the end of the exodus from the coasts is likely not over. The tech scene in Texas is still relatively small, so there are likely to be even more big moves in the near future with numerous Silicon Valley giants still lacking large Texas operations.
One segment of tech that has yet to set up a large presence in Texas is biotech. Biotech hubs often take time to develop because the real estate required for research is often very specific and expensive. Currently, Texas biotech is centered in Austin. It has yet to reach the scale of true biotech hubs like Boston and San Diego. With the coastal exodus, Austin will likely benefit from more talent and become a biotech hub in the next decade.
Another sector poised to continue to benefit is the housing market in Texas. This year alone, the housing market grew significantly with third quarter 2020 numbers showing statewide median housing price rising 8.6%. Furthermore, the median house price in Texas remains more affordable to the average worker, sitting at $266,000. At the same time, the exodus of high-income earners and luxury home sales (homes priced above $750,000 or more) only making up 4.3% of sales in the third quarter shows there is great growth potential going forward in the high end segment if the real estate market is to follow in similar footsteps to California and New York.
Effects on California and New York
California’s population is set to grow only .05% this year and New York growing so slowly over the past decade that now both are set to lose an electoral vote. Yet Texas has grown 14% from 2010-2018, adding millions of new residents in that time. Projections suggest that by 2040 the state will have a population greater than 45 million. This will likely put it neck-and-neck with California’s population.
Prior to the pandemic, many of the people leaving California could not afford the high cost of living. But, now that the pandemic has changed the way we live and work, both tech workers and tech companies are learning that they do not need to crowd in Silicon Valley. The same phenomenon is occurring in New York. Financial firms and bankers are learning that they can move out of the city and to other states such as Texas to take advantage of no income tax.
This is problematic for both states as a high proportion of tax revenue currently comes from high-net-worth individuals. Those earning $500,000 or more make up 50% of California’s income tax revenues. 80% of that revenue comes from people who made over a million. While middle-income individuals leaving California do little to affect state income, a proposed wealth tax by California in the past months that may affect a small percentage of California’s high net worth individuals (those worth $30 million-plus) will have dramatic impacts on the state’s budget if those people flee.
Many companies have already made clear recently that they are betting hugely on Texas, the second-largest economy in the US. Texas is set to grow and prosper at the expense of other coastal states such as California and New York. The Texas economy is undergoing great fundamental change. A surge in high-paying jobs will bring with it college graduates. This will bid up housing prices. Texas will transition from a once oil-driven economy to one fueled by the next generation of innovation from large companies. The combination of tax-friendly policies and fair weather will continue to lure more and more companies and talent to the region in the coming decades, growing the economy significantly and narrowing the economic gap with California.