By Richard Rubin and Theo Francis
Moves by high-profile companies to Texas from California are
likely to improve the personal finances of executives and offer
employees more affordable housing -- but make little difference to
the firms' tax bills.
Oracle Corp. and Hewlett-Packard Enterprise Co. are the latest
big corporations to announce moves to the Lone Star State. Elon
Musk, the chief executive of Tesla Inc., is also moving to Texas,
and the electric car company is expanding there.
The announcements have highlighted the vastly different tax and
regulatory systems in the country's two most populous states.
California relies more on taxing personal income, particularly of
high-income households, and operates a growing regulatory
structure. Texas leans on more regressive property and sales taxes
and boasts a more laissez-faire environment. The biggest
difference: High-paid executives who move can see their state
income-tax bills go from 13.3% to nothing.
But corporate investors hoping for big tax and other savings may
need to temper their enthusiasm. Business-tax considerations are
likely to prove secondary at best, tax and economic-development
experts say. They are dwarfed by the allure of more-affordable
housing, lower cost of living and lighter regulatory burdens.
For companies, much of the difference between California and
Texas boils down to ease and cost of hiring -- not just now but
down the road.
"A lot of it, honestly, is just long-term workforce
availability," said King White, chief executive of Site Selection
Group, a consulting firm that helps companies decide where to open
or move facilities.
Companies have also grown frustrated with the cost of attracting
and keeping employees, as living expenses soar in Northern
California especially, and as regulatory mandates expand. "The
compounding effects of California's economic and political
environment is making it more difficult to run a business
effectively," Mr. White said.
Oracle may not move many jobs, even though the software maker
cited workplace flexibility for the address change. HPE already has
big operations in Texas. The server computer maker said it was
moving to find diverse talent and long-term savings. Adam Bauer, an
HPE spokesman, said the move wasn't driven by taxes and there will
be no corporate tax benefit.
"It's not always a clear-cut case that Texas is a winner
compared to California," said Matt Hunsaker, a state-tax lawyer at
Baker & Hostetler LLP who practices in both states but wasn't
discussing any particular companies.
"It's not worlds apart for business taxes." he said. "But it can
be worlds apart for [individual] income taxes, and a lot of times
that's important to the business in managing their payroll costs
and keeping their employees happy."
The Tax Foundation, a conservative-leaning Washington group,
puts Texas 11th in its ranking of state business-tax climates, with
California 49th. That is largely a function of individual taxes,
some of which do fall on business income. The group ranks
California ahead of Texas on corporate and property taxes.
Texas collects 5% of its private-sector economy in business
taxes, ahead of the 4.5% national average and California's 4.3%,
according to the Council on State Taxation, a business group.
Historically, companies have focused much more attention on
federal taxes than state taxes. After the U.S. cut the federal
corporate tax rate from 35% to 21% in 2017, state corporate taxes
became a more important cost for companies.
"Oracle's departure only drives home the point," said Jared
Walczak, vice president of state projects at the Tax Foundation.
"It has never been easier for individuals and businesses to
relocate to avoid high tax burdens and other costs."
Changing addresses or even moving people and facilities doesn't
necessarily change a company's tax costs on its own.
Both California and Texas generally determine a company's tax
base in their state by looking at what share of their sales happen
in the state. So moving employees without changing where they sell
products and services is unlikely to do much to alter what a
company owes. California's corporate income tax has an 8.84% top
rate; the Texas franchise tax has a much broader base and a 0.75%
The bigger factor -- outweighing any change in business taxes --
is likely to be the lower cost of employing workers in the state.
For most people, that calculation is more about housing costs, said
Darien Shanske, a tax law professor at the University of
California, Davis. Housing scarcity and land-use regulations are
bigger drivers of payroll costs than taxes.
"Moving a headquarters to Austin where people can afford a place
to live, that dominates whether they pay the personal income tax,
for most people, " Mr. Shanske said. "If some centimillionaires
decide to move to Texas, that strikes me as less interesting than a
whole swath of the upper middle class feeling that they're being
impinged by housing prices" in California.
In an era when remote work has suddenly become the norm in many
industries and professions, companies can often take advantage of
cost-of-living differentials without wholesale moves. High-paid
executives can move to a zero-tax state even if the company
doesn't, for example. The moves have an even larger tax advantage
than they used to because of the $10,000 cap on the state and local
tax deduction from federal taxable income.
Company founders who want to minimize state taxes when they sell
stock don't have to live where the headquarters is. They can move
away from California before they sell, no matter where the office
is. Oracle founder and Chairman Larry Ellison told staff this week
that he moved his primary residence to his island retreat in
Hawaii, a state with individual income taxes.
Critics of California's policies say local taxes are sometimes
designed to shape corporate behavior. A San Francisco ballot
measure approved last month will tax companies higher if their
executives are paid too much more than front-line workers.
"Some of these taxes may not be terribly onerous, but they are
designed to drive company policy, which I think companies find
problematic," Mr. Hunsaker, the tax lawyer, said. "Most companies
-- when they are thinking of moving -- they may be thinking about
taxes, but usually there's something else that's driving it."
Write to Richard Rubin at firstname.lastname@example.org and Theo Francis
(END) Dow Jones Newswires
December 16, 2020 08:12 ET (13:12 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.