Elon Musk Just Made a Tricky Move Look Simple. It Gives Him a Giant Advantage
First, the background. Musk grew up in South Africa, moved to Canada at age 17, and acheived his immigration goal starting when he came to the United States for college in 1992. He became a U.S. citizen a decade later.
Musk has sung America’s praises ever since.
“I remember thinking and seeing that America is where great things are possible,” Musk once said, “more than any other country in the world.”
Within the United States, Musk was in Pennsylvania, then briefly at Stanford University before dropping out to start his companies in Silicon Valley. As a result, it seems he has likely been a California resident ever since, for legal purposes–at least, until the decision he made public last week.
“For myself, I have moved to Texas,” Musk confirmed during an interview with the Wall Street Journal.
He cited two reasons: growing Tesla and SpaceX operations in Texas, and the idea that California simply has too many regulations and business restrictions.
But, there is also another enormous potential advantage that Musk gets if he’s now a legal resident of Texas: namely that there is no state income tax or capital gains tax for individuals in the Lone Star State.
California, by comparison, has the highest state tax rate in the country, 13.3 percent at the top, in addition to federal income taxes.
Now, I’m hedging slightly on whether Musk is actually, technically, a Texas resident; that’s a legal question that comes down to whether he can “pass the teddy bear test,” as tax lawyers and accountants put it.
Frankly that’s what makes this kind of move very tricky for someone like Musk–although it looks as if he might have pulled it off methodically and easily.
Over the past year or so, Musk made a series of legal and real estate moves, and if they’re sufficient to demonstrate he’s cut off ties with his base in the Golden State, it will give him an especially “enormous” advantage (or “gigantic,” or any other Texas-sized word you’d like).
It comes down to how he gets paid. For example, at Tesla, Musk gets basically zero ordinary salary, but massive stock options, an arrangement that has left him described as someone with “perplexing personal finances–a multibillionaire who in past years has claimed he was cash poor, according to court records.”
In some years, according to reports, Tesla has said Musk as CEO had literally zero Tesla income.
But as the company grows, and its value hits various targets, Musk qualifies for multibillion-dollar options, enough this year to mean he’s jumped to number 2 on the list of the world’s wealthiest people. (More on that in a second.)
Musk also made the point that Tesla and SpaceX are the last significant car and aerospace manufacturers in California.
“There used to be over a dozen car plants in California, and California used to be center of aerospace manufacturing,” Musk emphasized during the interview. “My companies are the last two left.”
(The full video of Musk’s interview is embedded at the end this column.)
As we look to the future, Musk’s compensation is reportedly very back-loaded: In 2028, according to reports, he’d be potentially be entitled to a $50 billion payout if Tesla meets its targets.
Now, I’m confident that Musk has the best possible tax accountants, and I’m not going to embarrass myself by trying to do complex calculations on his future tax bills in a short online article.
But, imagine if Musk were a California resident when he received that $50 billion payout. The state tax bill could easily be billions. I know a lot of people who would move for a lot less than that.
This brings us to a rather existential question: When we’re talking about people with such high net worths, does adding yet another few billion dollars appreciably change their lives?
I’m confident I will never learn the answer to that question, firsthand. But Musk knows.
And while I don’t know if being the second-wealthiest person on the planet matters to Musk, you tell me: If you were ranked #2, wouldn’t you want to be #1?
The current holder of that title: Jeff Bezos, who lives in tax-free Washington State.
Bill Gates, #3, lives there, too.
That means that in the wealth accumulation contest, such as it is, they’ve both had a big advantage. And if Musk has truly moved to Texas, it means he’ll have it now, too.
Here’s the video of Musk’s interview, in which he announced the move.