Tesla’s Move to Texas Could Save Staff — Particularly Its Billionaire CEO — More in Taxes Than the C

Personal Taxes, Affordable Housing Are Key Benefits for California-to-Texas Relocations

Tesla said it plans to move its headquarters to Austin, Texas. (Getty Images)

When Tesla relocates its headquarters from California to Texas, it will be one of the biggest of at least seven Fortune 500 companies to do so in the past few years. But when it comes to lower taxes in Texas, attorneys and relocation consultants say employees benefit more than the company.

Corporate taxes can be affected by where a headquarters is located as well as by where a company does business. So recent corporate relocations could benefit employees and executives, including Tesla's billionaire CEO and founder Elon Musk who personally made the move to Texas last year, because there's no state income tax in Texas.

"You can have a company move its headquarters out of California to Texas and it may have virtually no impact on the taxes the company pays nationwide," said Matt Hunsaker, a state tax lawyer at Baker & Hostetler law firm who practices in Texas and California but declined to discuss specific companies. "To see a change, you'd have to see a shift of where these companies are doing business rather than where their corporate home happens to be."

The issue of lower costs is often discussed whenever a large company moves California operations real estate to Texas, but a closer look at the many aspects of a corporate relocation between the two states shows the Texas tax system can offer bigger savings for individuals than companies. The topic of lower personal taxes has become more relevant for Musk this week after Tesla became one of only seven global companies to ever have a stock market value of over $1 trillion, which given his sizable holdings considerably increases his personal wealth on paper.

While Texas has a corporate franchise tax that operates differently than California’s corporate income tax, the tax differences for companies in the two states are negligible, Hunsaker said. But for employees relocating from California to Texas, they can save quite a bit on personal taxes. California has a state income tax of 13.3%, while Texas doesn't have a state income tax.

“If you're Elon Musk and you're a Texas resident, you have a huge tax cut,” said Ken Rosen, chairman of the Fisher School of Real Estate at University of California Berkeley's Haas School of Business, told CoStar News, adding even mid-tier and lower-tier employees would benefit from a relocation. “With a 13.3% personal income tax rate, that means you’re earning 13.3% more immediately when you move to Texas.”

Tesla didn't respond to an email about whether taxes played a factor in its plans to move to Texas.

Even so, there can be drawbacks for employees who relocate. The lower cost of living, from taxes to house prices, in Texas than California can hurt workers when a company decides to adjust its compensation lower to account for the less expensive local market. Even so, lower house prices and a higher quality of life, two benefits of a less dense population, along with the lower taxes, can help offset such a wage reduction.

Tesla's Move

Musk told Tesla shareholders in early October that the company would move its headquarters from Palo Alto, California, to Austin, Texas, where the company is building its first electric vehicle manufacturing plant in the state. Tesla bought more than 2,500 acres in East Austin along the Colorado River last year to build the factory.

Texas gives Tesla the ability to expand its business, which is difficult to do in the Bay Area where it is tough to afford a house and workers have to commute from far away, Musk said on the investor call. The Austin factory is 5 minutes from the airport and 15 minutes from downtown. Even so, Tesla recently committed to a large office in Palo Alto despite the announced headquarters move to Texas.

Musk didn't disclose a timeline for the headquarters move or further details about relocation plans for employees. No site has been identified for Tesla's new headquarters, but some Austin real estate professionals expect it will be built on the acreage along the Colorado River by the factory, which is estimated to span 4 million to 5 million square feet and produce its first Model Y cars this year.

"We’re going to create an ecological paradise here on the Colorado River; it’s going to be great. [We're] continuing to expand in California significantly, but even more so here in Texas," Musk said earlier this month.

Tesla's plan to relocate its headquarters follows other automakers such as Toyota North America, Nissan and Mitsubishi Motors taking part in what is being called a great auto migration out of California, said Jessica Caldwell, executive director of insights at U.S. vehicle sales tracker Edmunds who has been an automotive analyst for more than two decades.

"Companies are moving near their plants for some of the economies of being nearby, with plant locations generally having a lower cost of living," Caldwell told CoStar News. "Automakers are fleeing the high costs of California.”

Toyota's Move

Toyota North America, a subsidiary of Japan-based Toyota Motor Corp., picked a 2,000-acre site south of San Antonio to build a 2.2 million-square-foot manufacturing plant in 2003. The relationship between Toyota and Texas blossomed, and the Japanese automaker relocated 4,000 corporate employees from its North American headquarters in California to a 100-acre campus in Plano, a suburb of Dallas, in 2017.

Since Toyota's $1.28 billion San Antonio plant opened in 2006, it has had a $50 billion economic impact with hundreds of suppliers and other businesses setting up shop nearby and creating thousands of jobs, according to city officials.

It's unclear how many jobs Tesla may move to Texas as part of its headquarters relocation; representatives for Tesla did not respond to requests for a comment on the relocation.

Corporate relocations are making less of an immediate splash in the real estate world now that remote work is the norm due to the pandemic. When AECOM relocated its headquarters from California to Dallas this month, the global infrastructure design and consultancy giant did not plan to lease additional office space or increase its local workforce.

Still, corporate relocation executives say any headquarters relocation is an indicator of future expansion and investment in the area by a company and a positive for local real estate demand.

“If you relocated your corporate headquarters from California to Texas, the next time an office needs to grow, a warehouse needs to grow or a manufacturing facility gets placed, if you’re an executive sitting in Texas as opposed to California, you’re more likely to probably put that facility closer to you than farther from you,” said Chris Lloyd, senior vice president at McGuireWoods Consulting and chairman of the Site Selectors Guild who has helped Honda, Hilton and Performance Food Group with real estate decisions.

Tesla, for example, chose Texas as the first state where it started selling car insurance in early October and is adding more service offerings in the state, such as its partnership with Brookfield Residential to use Tesla's solar panels and battery roof systems for a new neighborhood in Austin.

Having a big-name corporation also gives a city more prestige, Lloyd noted.

“It’s bragging rights, which is an intangible but very real issue,” Lloyd said.

Even if companies don't require employees to relocate, more workers could gradually decide to make the move to the new city over time as they start to travel to the headquarters for work and experience the quality of life, said Susan Davenport, chief economic development officer at Greater Houston Partnership.

Cost of Living

Companies could save on payrolls if they adjust salaries to the local cost of living, something Rosen with UC Berkeley suspects many are doing. But there are limits to lower salaries, because less pay might make it hard to recruit sought-after tech workers, especially in markets such as Austin that already have a tech talent labor pool that is significantly smaller than San Francisco's.

King White, president and CEO of Dallas-based Site Selection Group, said Tesla could face challenges recruiting talented employees in Austin, which has a total population of about 2.2 million residents while the Bay Area has about 6.7 million residents.

"Their brand will bring a lot of people in relocating from California, which will add to Texas' population growth and the challenges, such as wage inflation, in Austin," White told CoStar News in a phone interview. "This could create challenges for companies already operating in Austin with labor shortages and infrastructure challenges such as commute time and highway infrastructure."

Meanwhile, the lower housing costs in Texas are likely to be a draw for employees moving from California. In September, the median price of a home sold in Austin was about $545,000, which is significantly less than the median price in Los Angeles of $915,000 and the median price in San Francisco of $1.47 million, according to Redfin, a home listing website.

The housing market was a key reason why SmartDraw, a software firm once based in San Diego, relocated to the Houston area last year.

“We decided to relocate to Texas ... for many reasons, including the opportunity for our employees to become homeowners — something that was out of reach for many of them in San Diego,” Paul Stannard, CEO of SmartDraw, said in a statement.

Robert Allen, president and CEO of the Texas Economic Development Corp., said tech executives beyond Musk have benefited from a California-to-Texas move. That includes Dropbox CEO Drew Houston and Palantir Technologies co-founder Joe Lonsdale, who have also personally moved to Austin while their companies' headquarters remain outside the state, Allen said. Dropbox is based in San Francisco while Palantir Technologies is based in Denver.

Last year, San Francisco became the first U.S. city to pass what's been called a CEO tax, which applies to companies where the CEO makes 100 times more than the median worker's salary. The wide open plains of Texas is seen as another advantage.

"The pipeline of companies looking at Texas is robust," Allen said in a phone interview. "There's a limit to how big you can scale in the Bay Area," Allen said. "There's no limit to how big you can scale in Texas; the sky is the limit."