You can see all those factors at work in the Bay Area, where high-tech start-ups are increasingly sprouting and expanding across San Francisco and bulldozers are rolling again in the millionaire bedroom communities east of Oakland.
The region and the state are flush with venture capital, which is financing the growth of companies such as Sifteo, a next-generation video-game maker of sorts housed in a converted warehouse on the south end of San Francisco.
Sifteo co-founders Dave Merrill and Jeevan Kalanithi created a gaming system consisting of small cubes that players shake, touch and bump together to complete puzzles. The company sells its system online and in stores for about $130 for a set of three cubes; its staff of 27 has overgrown its office, where commuting bikes hang on the walls and electronic components spill over desks.
Merrill and Kalanithi hold PhDs from the MIT Media Lab. They’ve secured nearly $14 million in funding from investors since 2009. They hired 10 people last year and plan to add five more this year. They just acquired more office space to house their growing team. It was a fight for the space — the building is nearly full of companies — but Merrill says nowhere in the country would be a better home for Sifteo because of the concentration of engineering talent in the Bay Area.
Ask Merrill what he worries might disrupt his business in the next year, and he ticks off a list: Political changes in China that might raise the cost of manufacturing products there. A plunge in consumer confidence in America. A rapid decline of big-box retailers that stock his products.
He does not worry, he says, about tax increases.
Standard economic models hold that tax increases reduce growth. Some Republican governors are hoping that California’s hikes will drive companies and wealthy people to other states. Texas Gov. Rick Perry has openly courted California firms, and Ohio Gov. John Kasich just announced plans to do the same.
But many Golden State economists say the tax hikes won’t drive away companies. A Stanford University study last year found no link between tax rates and wealthy Californians’ decisions to leave the state, and the state has a history of tax increases not affecting growth, including under a Republican governor — Ronald Reagan.
“The evidence is, from past tax increases, that it makes very little difference,” said Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast, who predicts only a slight scrape to state growth from the new rate increases. Since 1967, he added, tax hikes and cuts in the state have had a “second-order effect” on growth.
The bigger threat, other economists say, might be another run-up of housing prices, especially where the innovators live.
Housing prices are a much bigger factor in most people’s budgets than state tax rates, said Jed Kolko, chief economist for the online real estate site Trulia. If home prices rise quickly, he said, they constrain growth more than taxes do: “The skilled workforce that California presents as an advantage,” Kolko said, “is also threatened by higher housing prices.”
Data suggest the threat is growing. Trulia reports homes sold for 10 percent more in California in January than they did the year before, with San Jose and Oakland the two hottest markets. That was double the rate of increase for the nation as a whole.