Is California’s fiscal crisis dooming Silicon Valley?

Not long ago, if you were starting a technology company, Silicon Valley was the place to do it. Access to talent, capital, top academic institutions and the entrepreneurial spirit made Silicon Valley the cradle for start-ups — and headquarters to the world’s most venerable technology companies.

“The Valley” ostensibly has not changed; unfortunately, our home state of California has. Not only is it no longer the mecca for business, just 15 years after the dot-com boom and it’s not even conducive for business.

For the record, I was born and raised in California. This is my home. But like many others, lately I’ve been questioning whether it’s practical to keep living and growing my business here. Especially since Proposition 30 passed.

And I wonder, will this rainforest called Silicon Valley survive the gross mismanagement of the State?

Leaving on a jet plane

This week, Phil Mickelson, one of the world’s top golfers from California, made headlines by saying he might be retiring and/or leaving the state, as opposed to paying 62 percent of his income in taxes.

He’s not alone. California reportedly now has more people leaving than coming. And the other 49 states aren’t just holding the exit door open; they’re buying the tickets, driving the buses and packing the suitcases for countless fed-up Californians. Not a day goes by that I don’t notice brazen advertising in California business publications or that I receive another highly compelling email from states like Arizona, Colorado or Texas — all propositioning my business to relocate.

So why do other states think that poaching California companies is like shooting fish in a barrel?

From longboards to longhorns

Once known as a place of infinite opportunity, our recent free-fall has left California as the worst place to do business. That’s why Apple is expanding its Austin, Texas presence with 3,600 new jobs. Apple was induced by a $21 million investment from the state of Texas through the Texas Enterprise Fund. That’s right. Texas is paying Apple to be there — do you hear that California?

At Zoho, we recently made a similar decision. Even though we are headquartered in Silicon Valley, we decided to expand our presence in Texas. We looked for a place where we could do business more easily and where our employees would have a better quality of life.

For example, an individual making $27,596 in Houston would have to make $50,000 for a comparable lifestyle in the Bay Area. Sure, you can rationalize paying a premium for the sunshine and incomparable amenities California offers, but paying more for everything (groceries, transportation, health care, etc.) is more than many can endure.

Proposition 30 – Insult to injury

Prop 30 may be the straw that broke the camel’s back, but the problem runs much, much deeper. High (and seemingly unending) personal and corporate tax rates are a major reason California gets a failing grade, but it also has to do with an overly-burdensome regulatory environment, which includes policies on health and safety, environmental, employment and labor.

There is a myth among tax-happy proponents that taxing more won’t stifle growth or change motivations to invest through capital investment or hiring. However, when taxes or costs are too high, it does change motivations. A simple and effective way to determine if costs are too high is to look at changes in behavior, such as:

  • Are individuals and corporations escaping?
  • Are people working less or retiring sooner?
  • Do individuals and corporations go to great extents to avoid taxes?

Look at Google, Facebook, eBay and others that have adopted elaborate tax schemes to reduce their U.S. tax burdens. Some might say they are tax evaders, but it is common sense and an instinctive reaction to punitively higher taxes and other costs.

When visionary companies like Apple are making business decisions to diversify out of California, it should give us pause. But when all of the visionary companies are rethinking their investment in California, Silicon Valley as we know it may hang in the balance.

Raj Sabhlok is the president of Zoho Corp., which is the parent company of and ManageEngine. Follow him @rajsabhlok.


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