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.
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!