This story is insanely misleading though. Everyone here is talking about why the tech elite are leaving due to the quality of life when Keith Rabois specifically has like 3-4 IPOs he was an early investor in going public right now and makes no sense to stay in California in 2021 and pay state capital gains taxes on those sales.
Same with Elon Musk and Tesla’s absurd stock price. And probably a lot of other people given the hot IPO market.
Point is it’s so disingenuous for these people to say it’s because of SF or California when it has everything to do with taxes and not much else.
To blast the Bay Area and state which made them rich and then flee before they owe a penny is gross.
California actually has fairly carefully considered taxation of equity compensation. It might be that the structure Rabois has put together allows him to avoid taxes on equity after he moves; but most people who are leaving will still have to pay those taxes when they finally sell.
Regarding their actions being a symbolic betrayal of the Bay Area, I suspect most of them feel betrayed. High income tax in California doesn't reflect high provision of services. It's due in part to poor cost control and in part to poor property tax policy, such that California's income tax is a de facto transfer of wealth from working people and capital investors to property owners. These investors, companies and workers have paid a tremendous amount in taxes, and have been repaid with ever greater taxation, ever decreasing access to the property they are helping to subsidize, poor services, and even disrespect.
There's no reason to assume that every tax, fee or levy that the government issues is justified. The authors refer to Twitter and other companies as being "...let...off the hook..." for a tax but fail to mention that this was San Francisco's effort to impose its own payroll tax!
Different situations. If you’re a VC you’re simply buying preferred shares. Shouldn’t be owing anything until you sell. And if your residence for that tax year is somewhere else I don’t know of any reason why California could claim capital gains tax simply because you invested in a pre-IPO company and selling post IPO.
The reason some people are surprised by tax bills when they move is because they vested their shares or options while in California as part of their compensation and then later moved. Logically it makes sense in that situation to owe state taxes on income that you earn in the state you earned it.
When you later sell you shouldn’t owe taxes in California if you’re out of state for that tax year.
If you held the preferred shares while you were a resident of California, why shouldn't you be subject to California CGT when you realize the gain in proportion to the length of your residency, just like if it were deferred employment compensation (taxed by CA in proportion to workdays in CA vs workdays elsewhere) or real estate (taxed in full by CA)?
Why should VCs get a tax preference employees don't get?
Yeah, it's weird that in California that if one does an in-kind transaction to obtain options or shares with labor, it's treated unfavorably relative to a cash transaction for the same things. It's a regressive tax: a special case to tax working people more for gains on equity. The normal way to recognize income on equities is at the time of sale.
This is one of a few examples where California's progressive politics haven't lead to progressive policies, whereas states that are much more non-progressive in their politics -- states like Texas -- have, as a practical matter, policies that are much better for working people.
I suppose that, hypothetically, when you purchase shares with cash it's "post-tax" cash; whereas when you purchase shares with labor it's "pre-tax" labor.
when you own shares as a VC it’s because you’re an investor. when you receive equity as an employee it is because it’s compensation.
when you get equity as an employee you’re taxed when you vest and when you sell. you shouldn’t be taxed when you sell by California if you’re out of state.
Well, this point specifically applies to options. Per FTB-1004 (https://www.ftb.ca.gov/forms/misc/1004.html) you will be taxed whenever you exercise, whether you're a resident or a non-resident. Doesn't matter if you're out-of-state for a particular tax year.
It is not really correct to cast this in terms of owing taxes on income in the state that you earned it because options are not income. There is a non-symmetry here with financial options generally: if you lived in California and bought some options, then left the state, and then, as a non-resident, exercised the options and sold shares, you would not be taxed in California because there was no income in California. Income on a stock transaction is generally recognized at the time a security is sold. Obtaining options and stocks both represent an outflow of money, not an inflow. It's a regressive policy to treat options purchased in-kind with labor in an unfavorable way, with regards to taxation, relative to those purchased with cash.
Well, VCs do sometimes get options -- that's what convertible debt is. Usually options are not treated as compensation, though.
It is likely that Rabois has a mix of compensation from his firm, as a practical matter, and some of it is likely to be options -- but even if not, Rabois and people like him have paid a lot of taxes in California. A lot more than they would have paid in most states. When you consider how much they paid relative to how well the state government has provided services -- taking other states into consideration -- it's hard to see how the people moving are betraying anyone. They paid and paid and paid.
Is that surprising? This is exactly how they treat the rest the world in business (e.g. Apple/Google/Amazon's elaborate international tax evasion schemes see dutch sandwich/double irish style arrangements).
Also see Uber/AirBNB "disruption" of not paying benefits/hotel taxes. I would be more surprised if they didn't "optimize" like that.
It’s not, but this entire thread is focused on quality of life issues, which is exactly what the “tech elite” mentioned in this article want people to focus on, and not the real reason why they’re leaving.
My point is don’t fall for their public relations spin BS.
This is a pretty wild spin to me, if those taxes came with clean streets and blowjobs the well paid non-bazzilionaires wouldn't be leaving for QoL reasons. Why should people feel loyalty to a city that has tons of money to go around for bottomless budget traps like junkies and dregs from out of state but nothing of significance for the people who actually make those support programs possible in the first place? The only reason before was the money and now those earners can get that money while living in a less exploitive environment.
I think you’re echoing OP’s point. Some people come to California for opportunity, and when they find enough success, they leave. They’re not CA natives, they’re expats from places with less opportunity and crappier weather. People who want to live in California view the taxes as a cost of enjoying California.
No my main point is that people on here are reading into Rabois’ comments on quality of life issues at face value and not recognizing that his move out of state at this moment in time has to do with avoiding taxes on his IPO gains and not much else.
I moved out of state BEFORE an IPO on options gained while working in CA that I then purchased as a resident outside of CA. This does not work as others are describing it. CA did and will come after anyone who earned options while in the state.
You had ISOs or NSOs either granted or vested or both while in CA and those count as income earned in CA. CA will tax that income, even if you don't realize the gains until after you leave the state.
A VC is investing in a company, like any other stock investment. There is no earned income.
In summary, for normal people, taxes in the US come at federal, state and local levels.
1. Federal:
a) Income tax of 10% on income over around $12k (single) or $24k (married) up to 37% on income over $518k (single) to $622k (married). Capital gains tax is at the same rate for assets held less than a year but up to only 20% for assets held more than one year.
b) FICA, a wage tax. You pay for 7.65% for social security and medicare/medicaid on all wages up to around $133k and 0% above that.
2) State. This varies widely. Some states have no income tax, some states have income tax rates of as high as 13.3% (California). Most are around 5%. Each state has different deductions and rules. Capital gains is usually included in this. Most states (but not all) also levy a sales tax of around 4% to 8% on retail transactions.
3) Local. Most local taxes are in the form of property tax on real estate. The rates vary from around 0.5% to 2% of property value. Some towns levy a separate sales tax on top of a state one (if it exists). The real estate and sales taxes are used to fund schools, police, fire, etc. Many municipalities also levy fees for water, trash, etc. Some cities also have an income tax (for example NYC).
To give you an idea of just how complex it is, the US has approximately 11,000 different sales tax jurisdictions. And it's not just a matter of rates. What is taxed and in what context varies. For example, in NYC, food from groceries is not subject to sales tax. But food from restaurants is. Unless, I think the restaurant has no more than some minimum of seats and you orders your food to go. Some sales taxes can also vary by date (i.e. sales tax during summer, but otherwise none). There are also occasional sales tax "holidays" where no sales tax is charged.
Unsurprisingly, tax lawyers and accountants make good money in the USA :-)
San Francisco is not allowed to have a city income tax due to state law. It wouldn’t matter much anyways: it’s a huge commuter town (daytime population is double or more the resident population), so the base to tax is relatively small. The real untapped taxable value in the city is land wealth. Until Prop 13 allows the city to tax land equitably, it will be forced to try harebrained tax schemes on employers or sales.
Small nitpicks: The Medicare / Medicaid portion of FICA is 1.45% and uncapped, and increases by .9% over $200k.
FICA is also paid equally by the employer (.9% ACA add-on excluded), so it’s only an accounting gimmick that prevents it from being a 15% tax on income.
If we want to start getting uppity about who is a Californian native, let's first consider the Muewkma Ohlone people who were decimated and whose lands were stolen by European settlers here in the Bay Area.
The state didn't make them rich. You're giving credit where none is due.
Their hard work coupled with many others like them that worked with them made them rich. The same group of people could have been in another state and done just as well.
The people in California that made people successful are the Peter Thiels, Elon Musks and Keith Rabois of the area. VC money is the king maker. In the Bay Area it all started with Fairchild. It's the same reason why Seattle is successful. All the Microsoft money seeded the tech scene there.
These kingmakers have had enough of California and are leaving for greener pastures where they can continue to build successful companies without the state leaching off their work.
If they show up in Texas and other states and succeed in replicating their success, it will be clear it was them and not California that was responsible for the success. I'm glad California is rapidly losing its undeserved monopoly on tech.
I’m not sure how to respond but no their success comes from being in Silicon Valley at the right time and developing relationships within this ecosystem. So no I disagree that if Rabois was somehow not in Silicon Valley that he’d be just as successful and wealthy as he is now.
And I’m speaking about his investments. Cutting a check is not “hard work”. You could argue Musk is different because he’s actually the CEO of the his company.
Why is Silicon Valley where it is other than accident of history? The US government could have made military investments elsewhere and Fairchild Semiconductor would have just as easily been in another state.
California and the SF Bay Area doesn't get credit for that. Heck, Silicon Valley was a bunch of fruit orchards for decades. Could have been a different set of fruit orchards in a different state.
Had Fairchild been elsewhere, the Traiterous 8 would have become the kingmakers they became in a different place and Keith Rabois or someone like him would have moved to that ecosystem instead to develop relations at the right time and become rich.
Seattle is the perfect counterfactual to the narrative you're invested in. Microsoft is Seattle's Fairchild.
Saying that all they are doing is "cutting a check" betrays the fact that you've likely never actually worked with a successful VC. The successful ones do so much more than cut a check. For example, the hard work they put in to help you identify and hire talent is indispensable.
I think you're severely underestimating the impact of California's investment in education. UC Berkeley and Stanford (private, but accepts state research grants) are top institutions which had for decades attracted some of the brightest minds (professors and students) to the area. These people helped shape the field, from early work on the ARPANET and Operating Systems to the Big Data and AI innovations of today. The expertise is passed on to students which creates not only a highly talented labor pool, but also trains the next generation of innovators.
Considering this concentration of talent, I think it's no surprise that the Bay Area is a hub for innovation, and the impressive list of companies founded by Berkeley [1] and Stanford [2] alumni is a testament to this. The concentration of talent is the environment that attracts funding and VCs, and will ensure that the Bay Area will remain the place to be in tech.
And Seattle, your "perfect counterfactual", has University of Washington, another state-funded top institution.
I don’t know why this response devolved into defensiveness and personal attacks. I never said I was a founder, though I worked at a startup that Rabois invested in early.
Being an investor is not “hard work” in the same way it is if you’re a founder or employee. Anyone who says it is is lying.
Sorry. Your comments came off as personal attacks on Keith and I mirrored your responses.
I've worked heavily with VCs when I was the first employee at a startup that did well for a few rounds and they worked very hard to help us out. The only difference is that they lived better while helping out because they were already wealthy, but they certainly worked hard for us and for their other investments.
You can be fiscally comfortable and still work hard.
Now I'm not defending how much ownership they take relative to what they put in. Both us and our VCs worked hard. They just took a greater chunk of the equity because of the capital provided.
The US federal government makes tons of military investments all over the country - I worked for one of them for years and it was not in CA. There was something specific about Silicon Valley. I think Stanford has a lot to do with it personally.
Both have a considerably lower number billionaires (2-3x) per capita, and the Florida number should be investigated to see where the money was earned. (What’s the per capita billionaire rate of, say, Monaco or St. Tropez? Is that meaningful?) It’s certainly a nice place to retire to, as evinced by Keith.
> I don’t know what you’re getting at but it isn’t my point.
I can't tell if you're upset by their disingenuousness, or by their refusal to give a cut to the state. If the former, I sympathize. But it mostly seems to be the latter. The obvious rejoinder to which: why should they feel so eager to fork over their money to an institution that did ~nothing to contribute to their success?
> California is expensive because the opportunity to become rich is greater here than elsewhere
Your statement only explains the e.g. high housing costs. The tax question is orthogonal.
My comment is a reply to this: "To blast the Bay Area and state which made them rich and then flee before they owe a penny is gross."
It's not gross to minimize your obligations towards people who have done nothing for you. Seattle is the relevant counterfactual: flourishing tech scene without the punitive tax burden that we're supposed to believe enabled California's success.
In the earlier days, Silicon Valley also had had satellite offices from some of major tech companies on Route 128. It was the minicomputer that upset this state of affairs.
Excepting special situations for certain PR and USVI residents, Washington state is as close to a tax haven as a US citizen is going to find.
> nor are tax dollars completely and utterly squandered in California
This depends on what you think the dollars should be used for. Most taxpayers would like to see their taxes used for provision of public services, and not in service of a vast public employee enrichment scheme. From this POV, the money is in fact squandered.
> It is gross how, the more money one makes, the more entitled one feels to not have to give a dime back
It's less about greed and more about abuse of generosity. See prior point.
Same with Elon Musk and Tesla’s absurd stock price. And probably a lot of other people given the hot IPO market.
Point is it’s so disingenuous for these people to say it’s because of SF or California when it has everything to do with taxes and not much else.
To blast the Bay Area and state which made them rich and then flee before they owe a penny is gross.