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Why a new class of cities threaten Silicon Valley’s supremacy

As VCs sour on California and New York, an emerging class of tech hubs stand to benefit from divided government: bright blue cities in ruby-red states.

Why a new class of cities threaten Silicon Valley’s supremacy
Austin, TX [Source image: Naeblys/iStock]
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If you’re a New York politician and you have nothing else to talk about, you can always bemoan the disparity between what New Yorkers send to Albany and Washington in taxes and what they get back in programs and services. The same is true for most major cities. Los Angeles and San Francisco subsidize the rest of California, and California’s taxes helps subsidize the federal government. Chicago subsidizes downstate Illinois. Boston subsidizes Western Massachusetts. Seattle subsidizes the rest of Washington State. It’s true of any successful city in any blue state. But as unfair as this may be, it’s not what’s putting the future of these cities at risk.

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As tech behemoths like Tesla, Oracle and HP and Wall Street giants like Goldman Sachs and Carl Icahn decamp San Francisco and New York City for Texas and Florida, there’s an emerging class of cities quietly benefiting from playing the politics of the left and the right at the same time: blue cities in red states.

Austin is the perfect example. Austin’s metro area has been the nation’s fastest growing for the past eight years. Every major tech company imaginable from Apple to Google, Cisco to Intel, Amazon to Facebook has operations in Austin. The allure is obvious: Austin is a fun, politically progressive city with a lot to do, great culture, great weather (except in the summer) and a thriving academic and entrepreneurial community. Of course tech companies want to be there.

But there’s something else that’s an even stronger draw: Texas has no state income tax. And because Texas prioritizes job creation over social or income equality, it imposes far fewer regulations on local businesses, often making it a lot easier and cheaper to operate there. On top of that, the lack of a state income tax not only saves transplants from New York and California a boatload of money, it also means that Austinites are not subsidizing anyone else. Local property taxes fund local services, so the money the new arrivals pay in taxes benefit them and only them. In fact, given its role as the seat of state government and as host of the main campus of the University of Texas, if anything, the rest of Texas subsidizes Austin. As a funding formula, it may not be equitable but it’s a great way to attract rich people.

The same holds true for growing cities like Phoenix, Atlanta, Nashville, Salt Lake City, and others. Ironically, even though committed Democrats in all of those cities are working hard to turn their states blue (or at least purple), from an economic standpoint, remaining a blue city in a red state has clear advantages. As long as companies with younger employees and customers can claim that they’re not abandoning their progressive values—they’re only trading one liberal hometown for another—they have all the political cover they need to keep relocating to low tax, low regulation states.

Ironically, the political and economic calculus may begin to change if an exodus of Californians, for example, turns Texas blue. Conservative legislation can hurt business—recall North Carolina’s misbegotten “bathroom bill,” which caused widespread economic damage when companies including PayPal, Deutsche Bank, and Adidas cancelled expansion plans in the state. But in general, companies will prefer to operate in low-tax, low-regulation environments so long as they can still attract young talent. If the Lone Star State begins to resemble California—with its high taxes, bureaucratic red tape, and exclusionary housing policies—why bother relocating to Austin?

There are numerous ways in which this game of interstate arbitrage might unravel. One possibility is the directed rebalancing described above, in which the relocation of tech companies from San Francisco leads to the Californication of nearby states. A similar scenario might also play out naturally, even without the movement of large firms, as younger (more liberal) college graduates migrate to states with lower costs of living. Equilibrium might be achieved in more cynical ways, too. Strategic business leaders in New York or California might conclude that, rather than fight to send more Democrats to Washington, their political efforts should be focused on flipping rival state governments from red to blue—making them less attractive for big firms eyeing the exits.

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This is more than just an intellectual exercise. Local policymakers need to take a long, hard look at what cities like San Francisco have to offer, and ask themselves at what point their politics become an impediment to new business formation. The enthusiasm among the venture capital class for new opportunities in places like Austin and Miami way prove fleeting—or even self-defeating, as new arrivals replicate the conditions from which they fled. In the meantime, consider whether state capitals in Albany or Sacramento are ripping you off. And beware the bright blue cities thriving in ruby red states. They might be a sign of what’s to come.


Bradley Tusk is a venture capitalist, writer, philanthropist, and political strategist.