Even the famously generous tech salaries in Silicon Valley are not enough to compensate for California’s expensive housing and high tax burdens, particularly relative to tech employees working in less expensive and lower-tax states like Washington.
Even the famously generous tech salaries in Silicon Valley are not enough to compensate for California’s expensive housing and high tax burdens, particularly relative to tech employees working in less expensive and lower-tax states like Washington.
Entry-level software engineers at two of largest tech firms in Silicon Valley must now dedicate more than half their after-tax salary to afford the typical home in their communities. And despite modestly lower salaries, housing is much more affordable and monthly disposable income much higher for these kinds of workers in historically less-prestigious tech satellite cities like those around Seattle.
Combining rent and home value data from Zillow with Glassdoor income information and household data from the U.S. Census Bureau,[1] we compared housing affordability for entry-level software development engineers at three leading tech firms with offices in Silicon Valley and around Seattle. We estimated the median home value and median rent for people who work at and around:[2]
The typical home value where people who work at or near Apple’s Cupertino headquarters live stood at $1.1 million at the end of 2015, slightly higher than the $1 million median home value for people working at or near the Google headquarters in Mountain View, California (figure 1a). Both values are almost double the median home value for people who work at or near Microsoft’s Redmond headquarters ($520,000) and people working at/around Google’s Kirkland campus ($437,000). In California, rent in the areas where Apple employees tend to live was roughly $3,985, compared to $3,748 for Google employees. In Washington, rent for Google employees working in Kirkland was $2,346, and $2,106 for Microsoft employees working in Redmond (figure 1b).
Of course, salaries are also higher in Silicon Valley. According to Glassdoor, the median base annual salary of entry-level software engineers[3] 2015 was $120,000 and $115,000 at Apple and Google’s California offices, respectively, and $110,000 at the two Seattle-area offices. But higher California incomes don’t fully compensate for Silicon Valley’s higher housing costs.
A single, entry-level software engineer in Silicon Valley with no additional income beyond their salary can expect to spend more than over half of their after-tax income on housing costs – either to rent or buy – for the median home in the communities where their colleagues typically live (figure 2).[4] In the Seattle area, the share of income necessary to rent or buy the typical home where local Google/Microsoft workers live hovers around 30 percent, a prudent standard by historic norms.
And if Silicon Valley’s housing costs alone weren’t high enough, accounting for property taxes and state/federal income taxes can make this number seem even more unattainable (figure 3).
But while California’s state income taxes certainly eat into housing affordability – especially considering that Washington does not levy a state income tax – the lion’s share of the differences between Silicon Valley and Seattle area workers’ housing affordability remains rooted in home values and rents. For example, assume Google employees in Kirkland were to pay state income taxes on par with their Mountain View peers. Then the share of income necessary for a typical mortgage payment would increase from 27.8 percent (accounting only for federal income taxes) to 32.1 percent (accounting for federal and state income taxes), and the share of income necessary for a typical rent would edge up from 28.8 percent to 33.2 percent.[6] Although housing affordability deteriorates as a result of state income taxes, differences in home prices and rents are much more important.
All this means that after deducting higher housing costs and state income taxes, single entry-level software engineers without a roommate are left with less than half the monthly disposable income for food, transportation, savings and other expenses enjoyed by their Seattle-area peers (figure 4). This is true for both renters and homeowners.
For a Google engineer deciding between Mountain View and Kirkland, the higher Silicon Valley salary works out to about $417 per month more in pre-tax income, but $357 less per month in after-tax income. The additional federal and state taxes associated with a higher income (and thus a higher effective tax rate) and the addition of state income taxes imply an additional monthly outlay of $773 for the Silicon Valley Googler relative to his or her Kirkland counterpart. If the Google engineer is a homeowner, higher home values – despite a lower property tax rate – mean that the Silicon Valley Google engineer pays $295 per month more in property taxes.
But the biggest difference remains in housing costs. For a Google engineer, owning a home costs almost $2,200 more per month in Mountain View than in Kirkland, while renting a home costs $1,600 more per month.
Of course, there are many benefits to physically being on-site at a company’s headquarters, and for some engineers, these nonfinancial benefits may outweigh the costs of Silicon Valley housing. Additionally, base salary does not capture total compensation. Equity awards and bonuses might add substantially to an engineer’s income. And while state income taxes may reduce take-home pay in California, they also help pay for vital (and presumably higher-quality) public services such as roads and schools. And finally, households may cope with high housing costs by increasing their combed income with a roommate or two (or three), and/or by marrying a working spouse.
These personal considerations aside, however, and despite higher salaries, there is a clear cost associated with the prestige of living in Silicon Valley.
[1] Data from the U.S. Census Bureau’s Longitudinal Employer-Household Dynamics Origin-Destination Employment Statistics (LODES).
[2] Last fall, we did a similar analysis for Apple headquarters workers.
[3] Defined as those employees with three or fewer years of relevant experience.
[4] We assume a single taxpayer with no dependents and account for federal income taxes, state income taxes where applicable, and county property taxes at the effective property tax rates for Santa Clara County, California (0.79 percent of home value annually) and King County, Washington (1.01 percent of home value annually). For homeowners, we assume that the home is purchased with a 30-year fixed rate mortgage at an interest rate of 4 percent and a down payment of 20 percent.
[5] We assume that property taxes for rental units are incorporated into the monthly rent.
[6] These assume constant base salaries at Google in Kirkland.
