Welcome back. This week, I break from Britain’s budget rollercoaster and turn my attention to the US.
As giant hubs for finance and innovation, New York and California have long propelled the American economy. But momentum in both coastal powerhouses is fading. I explain why — and what it means.
In the past decade, the states have faced an exodus of businesses.
California and New York have, by far, the highest net outflow of domestic companies across the US since the start of 2015, according to data from fDi Markets, an FT-owned database.
In that period, companies including Palantir, Charles Schwab, Hewlett Packard Enterprise and Elon Musk’s Tesla and SpaceX have shifted their headquarters from the Golden State.
In New York, major financial services firms such as Elliott Investment Management, AllianceBernstein and ARK Investment Management have moved their main offices from Manhattan.
Cities in Texas, Florida, Tennessee and North Carolina have been the main inflow destinations.
Since 2019, the most cited reasons for relocation have been the regulatory environment and the availability of skilled workers, according to fDi Markets.
Indeed, New York and California hold the top spots for the number of regulatory restrictions across the US, based on data collated by George Mason University’s Mercatus Center. First-ranked California has more than three times the US average.
New York and California boardrooms often complain about onerous permitting rules, licence requirements and reporting standards that raise costs, crimp innovation and slow expansion. Both states have among the highest minimum wage rates, too.
A complex web of high taxes makes matters worse. “California and New York tax both corporate and individual income at high rates, while New York City also layers on additional levies for businesses and earners,” says Manish Bhatt, senior policy analyst at the Tax Foundation.
“Taxes aren’t the only reason companies and individuals choose to relocate, but both states are seeing outflows to more competitive states such as Texas and Florida,” he adds.
Individuals have been relocating, too.
Both California and New York have until recently suffered from a long period of net negative migration, driven by large annual outflows of domestic migrants.
A recent jump in international arrivals has supported population growth. But the Trump administration’s broader clampdown on undocumented workers, universities and foreign students threatens to deter legal, skilled foreign arrivals in the years ahead.
“People leaving both states tend to be younger, wealthier and higher educated than the general population,” says Aziz Sunderji, founder of Home Economics, a US housing market analytics firm.
Sunderji’s analysis of survey data since the late 1990s shows employment has been the dominant motive for individuals leaving both states. But in the past decade, housing costs and family have become more important factors. The outflow of workers looking to grow their family gathered pace during the pandemic.
Even considering both regions’ high-paying jobs, the cost of living is high.
The median house price-to-household income ratio in major urban areas in both states is well above the US average, according to Harvard University’s Joint Center for Housing Studies.
High rents and homebuying costs are driven by a chronic lack of housebuilding. This is the legacy of restrictive zoning laws, high construction costs and Nimbyism.
But shelter isn’t the only drain on residents’ finances. Across 272 urban areas, Manhattan, San Jose, San Francisco and Brooklyn rank in the top five most expensive in the US based on the Cost of Living Index, produced by the Council for Community and Economic Research. The metric aggregates housing, utilities, groceries, transport and healthcare expenses.
This helps to explain the success of Zohran Mamdani’s affordability-centred New York City mayoral campaign this year.
In sum, a self-reinforcing cycle has emerged.
“As people leave both states, the case for businesses to relocate to follow skilled workers and customers becomes even stronger,” says Scott Lincicome, vice-president at the Cato Institute. “This then creates talent and innovation ecosystems that attract new start-ups and workers at already established firms.”
In turn, the soaring cost of living builds the case for New Yorkers and Californians to follow employers elsewhere.
“Booming, less expensive housing markets in areas with large reputable universities in places like Austin, Atlanta and Raleigh reinforce this trend,” adds Lincicome.
The loss of businesses and workers puts strain on California and New York’s economic model.
Decades of fast growth has translated into rising demand for public services. New York and California rank among America’s highest-spending states on welfare, education and health per capita, based on data from the Tax Policy Center.
Pressure for social and environmental protections and redistribution has also accompanied both regions’ rise.
Public revenues have, however, become dependent on footloose finance and tech firms and their well paid white-collar employees. For instance, Wall Street accounts for about one-fifth of New York’s tax take. In California, the top 1 per cent of earners pay nearly half of personal income-tax revenues.
Both states are struggling to balance the books. New York faces an estimated cumulative three-year budget deficit of $34.3bn. California has a projected $18bn shortfall for the new fiscal year.
The artificial intelligence investment boom and bumper dealmaking on Wall Street are set to provide a near-term boost to tax take. But the continued loss of cornerstone taxpayers isn’t sustainable.
In the decade between 2011 and 2021, New York lost $111bn in net adjusted gross income due to interstate migration, and California lost $102bn, according to the National Taxpayers Union Foundation.
Despite the years-long outflow of people and business, California and New York are still magnets for start-ups, funding and talent. Their strengths in technology and finance won’t disappear any time soon.
Even while organisations are shifting their headquarters from the states, they often retain significant office presence in both.
But neither can California or New York afford to be complacent. Budget deficits are adding to fears around future tax rises, which risk repelling more high-income professionals. Mamdani has touted higher taxes on companies and the rich.
Both states need to trim costs and improve their competitiveness to shore up their long-term revenue flows. Other regions aren’t just offering lower taxes, they increasingly promise a friendlier business environment and higher standard of living too.
For measure, between 2020 and 2024, the net gain in tech employment in Dallas, Austin and Houston far surpassed that in the Golden State and Empire State combined, according to Oxford Economics.
The shifts in American economic centres of gravity are both a sign of the country’s broad-based resilience and a reflection of New York and California’s waning competitiveness.
But, the fortunes of the coastal states also hold lessons for the US’s currently booming southern areas.
Keeping the state lean creates the fiscal space to offer attractive tax rates and invest in competitiveness. Light-touch regulations support business growth and construction, which prevents property prices from spiralling.
An influx of big companies and high earners may fill the coffers today, but prudent governance is required to sustain it. In America’s competitive federalist model, no state can rest on its laurels. As California and New York demonstrate, taxpayers can and do vote with their feet.
Send your thoughts to [email protected] or on X @tejparikh90.
Food for thought
The US’s innovative edge isn’t just underpinned by a dynamic private sector. This blog highlights the vital role government funding plays.
Free Lunch on Sunday is edited by Harvey Nriapia
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