Market Conditions In California Working Against Silicon Valley Big Tech

Pundits and industry watchers continue to forecast a demise in Silicon Valley and the tech companies in the region.  While the valley's influence may be slowly diminishing, there's still a significant hub and concentration of talent unlike any other region in the world.  For those who can still afford to live here, access to top talent, capital, weather, and industry expertise remains parallel to none. 

Yet, five factors play a role in the long-term decline of Silicon Valley:

1. Punishing tax environment. The CA state income tax is as high as 12.3%. Sales tax is 7.25%, but in many counties it’s almost close to 9%,  Meanwhile, corporate tax earned in state is 8.84%.  Despite record inflows, the state is running a $22.8 billion deficit with a plethora of poor spending priorities.
2. Housing unaffordability. Despite tons of "Stalinist" type central planning ripping local control away from cities, these top down policies have led to more expensive housing and less abundant affordable housing.  In fact, housing is more regulated and more expensive to build. For example, an "affordable" housing unit for most cities will cost between $850k to $1 million a 1200 square foot unit.  Homelessness remains a huge issue despite all the housing bills passed..
3. Anti-capitalistic, social policies. The unfriendly social policies go further than most.  Woke ideology, teacher unions wreaking havoc on schools, support for illegal immigration, lax policy on drugs, encouragement of homelessness, and a belief that capitalism is evil works against the entrepreneurial spirit.
4. Lack of public safety and increasing crime.  Weak DA's, defunding the police, and lax enforcement for property rights has led violent crime to increase 6%, aggravated assault to move up 8.9%. Property crime is up 16.9% including home break-ins, catalytic converter thefts, shoplifting, and car break-ins.
5. Population and corporation flight.  Over 249,000 people left in 2021. Since 2020 173,173 have left and since 2018 524,494 have fled the Golden State.  California's tax base shrunk to $24.6 billion between 2010 and 2018.  In fact 352 major companies have moved their HQ since 2018.

Recent Layoffs Are An Opportunity To Cull The Herd, Not A Sign Of Weakness

 

After massive hiring over the past three years, tech leaders have ramped back hiring and started cuts.  Many companies hired lower quality talent at higher wages. Tech companies have traditionally stack ranked employees and reduced the work force from 3 to 7% every year.  Consequently, despite the large number of layoffs, the net increase in jobs from 2019 to 2021 remains above 20%.  Every company is using this opportunity to let go of low performers, rebalance allocation of talent, and reduce fixed costs.

The tech market has had over 1400 rounds of layoffs with 220,000 jobs cut in 2022. As of 2023, over 75,000 job positions have been cut to date. The result has been improved rebound in the stock prices.  Despite these cuts, there remains a huge demand for tech talent.  Most IT services vendors can not hire enough new talent and still face massive attrition in the 20 to 30 percent range.

The good news - despite losing their positions, many workers who have been let go have been able to find a new position in less than 60 to 90 days.  A good number are creating the next wave of innovation as they build their own startups.

Those Producers and Creators Who Can, Have Left

Many billionaires have already left the Silicon Valley including Elon Musk, Jack Dorsey, Charles Schwab, Sergei Bryn, Larry Page, Safra Catz, Reed Hoffman, Scott McNealy, and others.  The ones that have to work here have stayed like Mark Zuckerberg and Sundar Pachai.

The big out flux is to Austin, South Florida, Denver, Seattle, Raleigh-Durham, Las Vegas,Dallas-Ft Worth, Space Coast-Orlando,, Atlanta, and Indianapolis.  Vala Afshar and I recently interviewed Rebecca Fannin for her book Silicon Heartland detailing the growth and manufacturing renaissance.  Expect more regions to gain tech talent as housing affordability and quality of life create new tech centers.

To add insult to injury, the state of California is trying to tax folks from leaving, including those who have left.  Starting in January 2024, Progressive democrats such as Assemblyman Alex Lee, hope to impose unconstitutional taxes on those who leave and many who left. He's proposing an extra annual 1.5% tax on those with a “worldwide net worth” above $1 billion, starting as early as January 2024.  In 2026, the tax would impact hose exceeding $50 million in net worth.  the threshold for being taxed would drop: Those with a worldwide while billionaires would still be taxed 1.5%. 

These progressive democrats have continued a pattern of destructive tax and housing policies leading to Silicon Valley's decline.. A reread of Ayn Rand's Atlas Shrugged would be a good refresher for those in power.  Fortunately,on the federal front, Congressman David Schweikert of Azrizona is proposing a prohibition of an exit tax at the federal level.

The Bottom Line: Opportunity Zones Will More Evenly Distribute Tech Talent

As folks flee Silicon Valley, many seek to defer taxes on previous year end gains and avoid paying federal taxes on capital gains after 10 years for stock, real estate, and sales of business.  Created by the 2017 Tax Cuts and Jobs Act, Opportunity Zones (OZs) provide tax benefits to investors who invest eligible capital into these communities.  This combination of flight from California and OZ's will serve as the catalyst in creating mini tech hubs throughout the United States.