Tesla (TSLA) Moves Headquarters from California to Texas

Electric carmaker Tesla, Inc. (TSLA) is following its CEO Elon Musk to Texas. At Tesla's annual shareholder meeting on Oct. 7, Musk announced that the company would shift its headquarters from Palo Alto, California, to Austin, Texas. He said that expensive housing in the Bay Area and difficulty in scaling operations in the Golden State contributed to the move.

Musk is already a resident of Austin's suburbs. He moved there last year to oversee the building of a Gigafactory. Another Musk venture, SpaceX, has a space engine factory in Central Texas and a rocket launching facility in South Texas. This past July, Musk announced plans to build another space engine factory near Waco, Texas.

However, Tesla's latest decision is not a goodbye to California. In fact, Musk told shareholders that the company is planning to expand operations at its facility in Fremont, California, by 50% in the future. "You go to our Fremont factory, it is jammed," he said. "We're like Spam in a can."

Why Is Tesla Moving to Texas? 

In some ways, Tesla's move from California was expected. CEO Musk began criticizing California in earnings calls and public appearances last year and tweeted that he was divesting his properties. He sued Alameda County, where Tesla's Fremont facility is based, and called their COVID-related health orders "fascist" in an April 2020 earnings call. Soon after, Musk was reported to have relocated to Texas. He has also moved his personal foundation's headquarters to the state.

"If a team has been winning for too long they do tend to get a little complacent, a little entitled and then they don't win the championship anymore," he told a journalist in December. "California's been winning for a long time. And I think they're taking them for granted a little bit."

The move to Texas has both personal and business tax implications for Musk and his company. California has the nation's highest top personal income tax and capital gains tax rates of approximately 13.3% each. Those taxes are in addition to similar levies collected at the federal level, bumping up the overall total for an individual.

While Musk is the world's second-richest person, most of his wealth is tied to stock options dependent on Tesla reaching certain targets. Thus, he is on the hook for state capital gains taxes and personal income tax every time he exercises those options.

Texas does not have either of those taxes. According to some calculations, Musk could save billions of dollars in tax money because of the move. (In a tweet last year, he clarified that he will continue to pay taxes in California proportionate to the amount of time he spends in the state.)

Those tax savings have also spilled over to his company. Travis County, where the company's Gigafactory is based, voted to give at least $14.7 million in tax breaks to Tesla last year. Texas also has the lowest combined state and federal tax rate of 21% among 50 states and Washington D.C., according to a study published by the Tax Foundation, a non-partisan think tank.

Tesla could further bring down its overall tax bill by taking advantage of Texas's gross receipts tax, which the state charges instead of corporate taxes. Again, the Tax Foundation's analysis found that the gross receipts tax is not transparent and benefits big businesses with vertical supply chains—i.e., companies that provide their own inputs to the manufacturing process. Tesla has a massive battery manufacturing plant, a critical component in its electric cars, in Nevada.

Those tax benefits are in addition to fewer regulatory burdens. Texas is a "more business- and employer-friendly state," according to lawyer Domenic Romano. "You have to jump through far fewer hoops in Texas or Florida as an employer than you do in California in terms of reporting requirements and more," he told CNBC.

Tesla joins an exodus of companies and executives shifting their base from California to other states. Now home to financial services giant Charles Schwab Corporation (SCHW) and tech behemoth Oracle Corporation (ORCL), Texas has been a notable beneficiary of this trend.

An Ambitious Agenda for Model Y and Diversity 

Besides announcing the move from California to Texas, Musk also announced grand plans for Model Y—Tesla's mid-size SUV. He said the company was planning to make it the best-selling vehicle of "any kind" by 2023. "Basically, we need Austin to get online. And then, Berlin to get online. And then, reach volume production," he said.

While the company's shareholders rejected a proposal opposing the re-election of Kimbal Musk and James Murdoch to its board, they approved one that requires Tesla to publish annual diversity and inclusion reports. Last week, Tesla was ordered to pay $137 million to a former employee who had to endure racial abuse while working at its Fremont facility.