Texas Eyes L.A. For Capital Gains

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Texas Eyes L.A. For Capital Gains
Joel Gross

Joel Gross needs to move the five employees of his web design company out of his Venice apartment and into real office space so that he can keep growing. But he feels Los Angeles County might be too expensive.

So he is seriously considering moving his company, Coalition Technologies, to Austin, Texas.

“The cost of living is much lower in Austin and they really roll out the red carpet for you,” Gross said.

What’s remarkable about this is that Gross wasn’t even courted by Austin. His interest in the city shows that many L.A. business people know all about the advantages of Texas, and Austin seems to be the city of choice.

But just in case there are any doubters, the Texas capital has stepped up its efforts to lure businesses from here.

Earlier this year, the Greater Austin Chamber of Commerce hired an Irvine consulting company to spread the word throughout California.

“We are talking to at least 10 companies every month, with more than half of them in Southern California,” said Jim Renzas, principal of that consultancy, RSH Consulting Group.

The Lone Star State has long been exploiting the high levels of dissatisfaction among L.A.-area business owners over the cost of doing business, from high labor and property costs to onerous government regulations and endless red tape at city hall. But it sees a particularly good opening now.

Part of the reason is the better economy there. Texas has added jobs at a 2.5 percent clip in the past year while California has seen less than a 1 percent increase in payroll jobs. The unemployment rate in Texas stands at 8 percent; California’s is close to 12 percent and L.A.’s is 12.1 percent.

Another reason: California’s assault on Vernon. Texas Gov. Rick Perry last month sent dozens of e-mails to manufacturers in Vernon, a tiny industrial city just south of downtown Los Angeles that California lawmakers are considering dissolving. Businesses there fear that disincorporation would end the business-friendly environment and sharply drive up the cost of doing business.

Local business leaders and economic development officials are trying to fight the Texas assault, but they are hampered by the region’s inherently high land and labor costs. Making matters worse, they say, is a general attitude among California and local officials of taking business for granted and heaping new taxes and fees on companies.

“There will come a time when California’s seemingly ceaseless stream of new regulations and fiscal crises – and the permitting delays, taxes and fees that are continually thrown at business – will drive companies out of this state and into the arms of cities such as Austin,” said Tracy Rafter, chief executive of the Los Angeles County Business Federation, which represents more than 70 local chambers of commerce and other business organizations.

Luring businesses

Austin officials have a good track record in luring local companies: Since 2005, a dozen companies from Los Angeles County have set up shop in Austin, bringing with them roughly 2,000 jobs.

Glendale-based LegalZoom.com Inc., an online legal document company, opened an office in Austin last year that has since grown to more than 100 employees. LegalZoom President Frank Monestere said last week the company is slightly ahead of schedule with its plan to bring its Austin office up to 600 employees within five years.

Monestere said LegalZoom chose Austin for its major expansion because of the city’s well-educated and young work force, its substantially cheaper cost of doing business, and strong outreach from local and state officials.

“They have a genuine interest in the welfare of our company, and that’s refreshing,” Monestere said.

For each of the last several years, Austin chamber executives had been making more than a dozen trips to California in search of companies to lure to Austin.

The contract with RSH marks a more aggressive approach.

“We continue to see a pickup in the number of companies expressing interest in relocating or expanding in the Austin metro area,” said David Porter, the Austin chamber’s senior vice president of economic development. “So that’s why we decided to hire RSH.”

One of those companies is Coalition Technologies, which Gross launched two years ago out of his Venice apartment after moving from Seattle. Gross, 27, has a close friend from San Francisco who last year decided to move his tech business to Austin.

“He has been constantly telling me how much cheaper everything is in Austin, that he’s had no problem finding top-notch talent and that the government there is a whole lot easier to work with than anywhere in California,” Gross said.

So, Gross contacted the Austin chamber about two months ago.

He learned that the cost of running a business in Austin can be 20 percent to 40 percent cheaper than in Los Angeles.

Meanwhile, housing prices are significantly lower, and that’s a key factor in the lower cost of labor in Austin. According to the Austin chamber, $50,000 in after-tax earnings in Austin buys the same standard of living as $70,000 in after-tax earnings in Los Angeles.

What’s more, because Texas has no corporate income and business gross receipts taxes, Austin is ranked in the cheapest category for taxes and fees on business nationally, while Los Angeles, Culver City and Santa Monica are in the highest category, according to the 2010 Cost of Doing Business Survey from Kosmont Cos. and the Rose Institute of Local Government at Claremont-McKenna College.

As if that weren’t enough, Austin has an incentive program through which companies that open offices in the city can get up to $7,500 in tax credits per job created. In addition, high earners in particular like the fact that Texas has no individual income tax.

Tough challenge

“It’s a very hard task to compete with costs and incentives from other states and out-of-state cities,” said Robert Swayze, vice president for economic development at the non-profit Los Angeles County Economic Development Corp.

Swayze said that the LAEDC has stepped up efforts to contact local companies in order to find out how to keep them here. The organization has used Dun & Bradstreet Co. guides and other financial data to target about 2,000 firms that appear to be in financial difficulty.

“We ask them if they’ve been contacted by any other states or out-of-state cities and Texas is the No. 1 reference,” he said.

LAEDC business retention specialists try to steer local companies to local resources to help them stabilize their finances so they can remain in the region. They also remind business owners about the markets in the L.A. region, the easy access to the Pacific Rim and a well-educated local work force.

The LAEDC has also brought back the “red teams” that first appeared during the recession of the 1990s. These are teams of local and state economic development officials convened to address concerns of a specific company; they come up with a specially tailored incentive package aimed at allowing the company to remain or expand within the county.

“We knock down every issue that we can in these retention cases,” Swayze said. “But there’s only so much you can do when you can’t compete on basic costs and there’s very limited help from Sacramento.”

As for Coalition Technologies’ Gross, he hasn’t decided if he will move his business to Austin. He wants to add 10 employees per year for the next five years. He’s considering a site in Culver City, which would allow him to remain in his Venice apartment. But he’s leaning heavily toward Austin.

“I love the beach, but at this point that’s probably not enough to keep me here,” he said. “It’s just so much cheaper on all fronts to be in Austin.”

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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