San Francisco voters could get a shot at taxing stock-based compensation as the city prepares for initial public offerings to bring in billions to hometown companies like Uber, Airbnb, and Slack.
The proposed initiative, introduced May 9, has six co-sponsors, meaning a majority of the 11-member Board of Supervisors backs it. The announcement comes the day before the trading debut of Uber Technologies Inc. Uber said it has raised $8.1 billion in its IPO, giving the company a market value of $75.5 billion.
The initiative would place an additional 1.12% payroll expense tax on the current 0.38% of taxable expense on stock-based compensation, retroactive to May 7. Stock-based compensation means any compensation involving equity interests—including stock, stock options, restricted stock, stock acquired as a result of employee stock purchase plans, stock appreciation rights, and phantom stock. The initiative would effectively ensure any subsequent companies expected to file for IPOs couldn’t escape the tax unless they leave the city.
Tax revenue would be deposited in a “shared prosperity fund” dedicated to affordable housing, programs for families, education, and youth, support for the low- and moderate-income workforce, and small business stabilization. An advisory oversight committee would be established to monitor and make recommendations to ensure that the fund is administered in a manner accountable to the community, the initiative said.
“With the restoration of the IPO Tax, we will invest hundreds of millions of dollars in critical services for the most vulnerable, in small businesses, in affordable housing, and in workers across the City,” sponsor Supervisor Gordon Mar said in formally announcing the filing of the initiative.
Stock-based compensation for employees of San Francisco-based companies going public this year is estimated to be between $4 million and $11.5 million, the San Francisco Controller’s Office said in an April presentation to supervisors. Potential candidates for IPO include home-sharing platform Airbnb Inc., workplace messaging software maker Slack Technologies Inc., cybersecurity firm Cloudflare Inc., and delivery service Postmates Inc. Lyft Inc. and Pinterest Inc. became public companies this spring, the controller said.
“San Francisco can no longer afford to give these corporations a tax cut,” said co-sponsor Supervisor Sandra Lee Fewer. “If they consider themselves to be a part of the fabric of San Francisco, they must pay their fair share.”
The tax applies to all stock-based compensation extending far beyond the tech industry,said Juliana Bunim, San Francisco Chamber of Commerce spokeswoman.
“We are shocked and disappointed that this tax proposal is radically more expansive that what Supervisor Mar claimed it was for weeks. Fifteen years ago companies were leaving San Francisco because they were told to pay a 1.5% payroll tax on stock options. Voters overwhelmingly voted to get rid of the payroll tax and replace it with the gross receipts in 2012. If you want to drive San Francisco companies out of the city when they go public, you only have to look at the history of stock based payroll tax to see that it’s an ineffective solution,” Bunim said.
Two Thirds Versus Majority Fight
The initiative also comes as the issue of how many votes an initiative needs to pass is hotly contested and litigated. The two-thirds majority vote requirements for special taxes, those that go to specified purposes rather than into a general fund, were established by Propositions 13, 218, and 26. But San Francisco used a California Supreme Court decision for a City Attorney opinion that concluded “it seems very likely that voters may now propose special taxes by initiative subject only to majority vote.”
San Francisco was the only city in California to tax payroll until voters in 2012 approved phasing out the 1.5% payroll tax for a gross receipts tax. A small persistent gap between what the city would have reaped from payroll tax receipts, now 0.38% of taxable expense, and what it is getting from gross receipts has San Francisco economic watchers warning that the city might have to go back to voters for a fix for true revenue neutrality.
The stock-based tax initiative’s author, Mar, is joined by co-sponsors Board President Norman Yee and supervisors Matt Haney, Hillary Ronen, Shamann Walton, and Sandra Lee Fewer. The introduction starts the legislative process, with the measure being referred to the Rules Committee where it can be amended before heading to the fall ballot. No mayoral signature is required.
Small business enterprises, those entities with less than $2,500 in tax liability or less than $250,000 of taxable payroll, would remain exempt from the tax.
The proposed initiative would join on San Francisco’s Nov. 5 ballot a 3.25% proposed tax on transportation network companies. The tax is a compromise measure worked out with Uber and Lyft.
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(Updates with details on Uber's IPO in the second paragraph.)