Business

Silicon Beach, or just another warm tax haven?

Sunshine and a business friendly climate have long drawn affluent Americans from northern cities to places such as Florida and Texas. But the economic fallout of Covid-19, coupled with the fear of rising taxes, regulation and more left-leaning politics in places such as New York and California have collided to turn the usual flock of snowbirds into a larger migration of wealth from north to south — one that could have big implications for jobs and public sector budgets.

Miami in particular has become the destination for what some are calling a mass “techxodus”. Executives from digital hubs such as San Francisco, Boston, and New York City are relocating to what they view as a more pro-business locale. Blackstone, Elliott Management, Icahn Enterprises, Citadel and Goldman Sachs have joined Japanese group SoftBank and numerous start-ups from the San Francisco Bay Area in moving jobs and investment to South Florida.

Miami’s mayor, Francis Suarez, is making it easy for them with tax credits, low interest rate loans and other economic incentives for business. In some ways, this is just the latest in a city vs city race to the bottom to lure big companies that offer up headline-grabbing job creation numbers. Such state and city business subsidies have tripled in the US since the 1990s, as every region tries to become the new Silicon Valley (or Alley).

Sometimes it works, as in places such as Austin, Texas, or Raleigh-Durham, North Carolina. But more often it becomes a race to the bottom, in which cities desperate for growth end up giving away far more than they receive in property breaks or job creation tax credits (a 2017 study by the Upjohn Institute found that these types of breaks make up roughly 70 per cent of the total incentives offered). The result is a downward cycle in which companies demanding good public services and strong educational systems end up eroding the tax base that creates them.

Miami isn’t alone in luring jobs and capital from larger economic hubs in the north. In the US, many manufacturing jobs have moved from the Midwest to the south in the past few decades, thanks to “right to work” laws that weaken workplace unions in the latter region. Sunbelt states such as Texas, Arizona and Florida also have the lure of lower housing prices and less regulation than many northern areas. According to a new Milken Institute survey tracking jobs, wages and high-tech growth in various urban areas, cities in top western states such as Utah and Idaho, and the south, are growing fastest.

Part of this is a post-Covid realisation of just how much work can be done remotely. According to a recent McKinsey Global Institute study on the future of work after the pandemic, 20-25 per cent of workers in eight advanced economies representing some 62 per cent of global GDP could do their jobs from home. CEOs are already leveraging the potential cost benefits of this by rethinking their commercial real estate footprints. One example is Salesforce, a company that has used its landmark office buildings as a marketing and recruitment tool, and has announced plans to cut office space in most cities, including its San Francisco headquarters.

One wealth manager for high net-worth individuals on the east and west coasts told me recently that he was seeing a mass exodus of clients to places such as Park City in Utah, Texas, the Bahamas and Switzerland. Low taxes and opportunities for ski and sun are obvious lures.

According to MGI, Madison in Wisconsin, Jacksonville, Florida, and Salt Lake City, Utah, have had the greatest inflow-to-outflow ratios in the past year. Small cities and states hard hit by the pandemic are competing fiercely for the new cadres of post-Covid digital nomads. Tulsa, Oklahoma, is offering remote workers $10,000 and access to co-working spaces if they relocate for a year. Hawaii is courting knowledge workers with free airfare, discounted hotel rooms, and work space.

There’s one catch, though — those who relocate to the Pacific island state have to do volunteer work with local charities. This is an excellent idea, as there is a huge risk that all the tax optimisation and “work from your ski chalet” migration will result in an increase in inequality and fuel resentment among the local population.

Automation and the increase in digital work means it’s likely that Covid-19 will concentrate more job growth in high-wage sectors, and that the share of employment in low-wage work will decline. That can be good news — but only if there are enough well-trained workers to capitalise on the opportunity.

In addition to simply handing out tax breaks, I’d love to see cities such as Miami insist that the big tech and finance companies flocking to the area do something to improve local education, infrastructure and housing. Many FT readers are probably familiar with the luxury of South Beach. But according to a United Way study, 37 per cent of Miami-Dade County residents struggle to afford housing, transportation, healthcare, childcare and adequate broadband.

That’s not a good look for an aspiring Silicon Beach. Let’s hope that the “techxodus” from various expensive and unequal coastal hubs doesn’t end up merely replicating their economic and political problems in cities even less able to cope.

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