If you’re an investment professional in New York, you’re probably thinking of leaving.
According to a Manhattan Institute Survey nearly half of New Yorkers earning more than $100,000 a year are. United Van Lines reports 67% of New York shipments are now “outbound,” and, as James Altucher observed in his trending LinkedIn post “NYC Dead Forever,” a Facebook group formed for leavers had 10,000 members in just three days. Covid has taken an existing trend and bent the curve sharply upwards.
Florida is the destination of choice, for high profile Wall Street figures from Paul Singer of Elliot Management to legendary Wall Street raider Carl Icahn, and for prestigious companies such as the Goldman Sachs asset management division. The list of investment firms creating new hubs outside New York is very long – Credit Suisse, Morgan Stanley, Barclays, UBS, Citigroup, Alliance Bernstein.
The boss of Moelis Investment Bank, Ken Moelis, says he was approached by staff themselves saying they wanted to make the move (“We’re a talent business…if that talent wants to do it in Florida, that’s where we’ll support them”.) Leon Cooperman, the CEO of Goldman Sachs Asset Management, predicts “Florida will soon rival New York as a finance hub”.
In this new age of remote working, businesses need to stay ahead of the curve and what this crisis has made clearer than ever before is that talent is mobile, particularly among the ‘Baby Zoomers’.
What this crisis has made clearer than ever before is that talent is mobile
The appropriately named Professor Florida (an American urban studies theorist) states “the business districts (of New York) – those places which packed and stacked knowledge workers in the vertical towers – they are in for a real reckoning”.
The relative attractions of the Florida climate are obvious (I once walked from my office in Manhattan in -19c, dodging into every third shop to avoid frostbite). New York is also suffering from a spiralling crime rate (there were 437 homicides in 2020, a rise of some 40%) violent crime has ballooned, the subway is bankrupt, and there’s a sanitation crisis. In September 150 business leaders in New York wrote to the Mayor Bill de Blasio begging him to address “widespread anxiety over public safety, cleanliness and other quality of life issues.”
But when I ask New Yorkers why they’re relocating to Florida the number one reason they give is tax. Florida has no state income tax, while New York’s high earners pay 8.82% plus “city” tax of 3.876% (that’s on top of the 37% Federal income tax – likely to rise under Biden). This adds up to almost Danish levels.
Politicians seem determined to make things worse. Mayor Bill de Blasio said he was “grateful” for September’s letter, but is on record for not wanting to be “cosy with the business community” and for stating “I’m not going to beg people to stay.” All this with a budget deficit of $9bn. Groups like “Make the Road New York” (who seem to be missing “out of” in their title) seek much higher income taxes, taxes on financial transactions and even on unrealized capital gains.
You might be tempted to think “oh that’s just New York,” reprising its 1970’s death spiral, but California is doing much the same. The top marginal tax rate there is currently 13.3% (its 8% even at $45,000 (E37,000)), and recent discussions have considered adding three additional surcharges and a 0.4% wealth tax for the really rich.
Forget Denmark, we’re talking Swedish levels.
No wonder then that green investment hero, Elon Musk, now the richest man in the world worth $195 billion, has had enough, and is quitting California for Texas. New Yorkers are fleeing for Florida, Californians are making a “Texodus.” According to a recent survey 26% “are seriously considering moving.” In 2020 135,600 people left (86,000 of them to Texas). Websites like “exitcalifornia.org” and “leavingthebayarea.com” have taken off.
As in New York, businesses are following individuals. Elon Musk has chosen Texas to base his Space Explorations Technology Corporation. Space is the future in his opinion – an industry set to grow to $2.7 trillion by 2040. An even greater shock was delivered by Oracle’s surprise shift of its headquarters from California to Texas. And other giants Hewlett Packard and Palantir Technologies have also decided to quit California for Texas. These are big names.
Again, like New York, many factors are cited including the wildfires, rising crime, and the high cost of housing (just try comparing house prices in San Francisco and Austin). But tax and political indifference are to the fore. Joe Lonsdale moving his venture capital firm 8VC wrote of San Francisco’s encouragement of open air drug users and restrictive zoning laws. Venture capitalist Keith Rabois called San Francisco “massively improperly run and managed.” As the CEO of the Bay Area Council Jim Wunderman recently said: “I think the pandemic really expedited a lot of organizations thinking about their future strategy.” The loss of venture capital is particularly worrying (there used to be a ‘twenty minute rule’ at one Silicon Valley investor that meant they would only consider funding any business within a twenty minute drive).
The challenge for politicians is a real one. If companies are relocating to other areas, jobs and tax revenues go too. The top 1% of California tax payers pay some 45% of the state’s revenues, so even relatively small moves have a disproportionate effect. Tax and spend politicians simply don’t get it. Take the “Hotel California” proposal (the proposed levying of a California wealth tax on anyone who spends just sixty days in the state with a terrifying “ten year lookback provision.”) Check in and never leave.
The role for responsible investors here is complex. Yes, we must lobby local politicians not to strangle companies or the entrepreneurs who create them. Note the dramatic U-turn recently by New Jersey Governor Phil Murphy to push through $14bn of corporate tax breaks to stem a flood of departures. But social responsibilities of companies should not be shirked, so when Jim Wunderman speaks of companies in the Bay area not liking regulators enforcing diversity, maybe this is where investors should step in.
And responsible investors should learn from what’s gone wrong in California with its sky high rents and wealth inequality. Some argue the “the tech industry is itself the villain, (and) having eaten the Bay Area alive (is) now in the process of spitting out the bones…the same rapacious billionaires are moving on to fresh prey…”Melodramatic? I am struck by one San Francisco business journalist saying the exodus reminded him of when he covered mid-West industry…before it turned into the rust belt. He said it was “like covering a never-ending funeral.”
I do fear politicians won’t stop the buccaneers. The tax and spenders will encourage them to leave, while new states will welcome them with open arms. Should investors at least seek to modify the social consequences?
Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.