San Francisco’s eight-year-old tax break to encourage tech companies to locate in the city—a.k.a the “Twitter tax break”—is ending with little taste to continue a corporate pass that’s cost the city on average $10 million a year.
May 20 is the sunset for the tax break that’s saved businesses $70.1 million since San Francisco enacted it, the San Francisco Controller’s office said. Companies that located in the the mid-Market Street and Tenderloin area—sections of the city where swanky movie theaters gave way to peep shows and drug dealers—could exclude a portion of their payroll tax. The idea was to retain companies with high-paying jobs that would flee south to Silicon Valley or east to Oakland to avoid the city’s tax on stock options once they went public.
But the climate for tax giveways has changed dramatically, with emerging tech companies blamed for everything from rising housing prices to clogged city arteries, due in part to transportation upstarts Uber and Lyft. Over the last month the average San Francisco home price was $1.4 million, up 1.7 percent from last year, real estate company Redfin said. That’s nearly double the $665,000 median sales price in the first quarter of 2012, according to Paragon Real Estate. The minimum qualifying income in the fourth quarter 2018 for a median priced home in San Francisco was $326,290, the California Association of Realtors said. And a just-published study pegged weekday traffic delays as up 62 percent in 2016 compared to 2010 in the days before ride-hailing apps were on everybody’s phone.
“I think everybody in the city knows that the economy is good. We’re seeing it in the effects of the affordability crisis and income gap, and in particular the rates of pay and in the case of TNCs (transportation network companies like Uber and Lyft) in traffic,” Supervisor Aaron Peskin said.
Numbers Show Success
The sunsetting of the credit arrives as the city posts numbers that show continued economic success:
- Information technology in 2008 accounted for 4% of private employment and 7% of total private wages and salaries, the Office of the Controller said. Those figures by 2017 had risen to 13% and 24%, respectively.
- More than 4,900 active technology startups were founded in San Francisco between 2008 and 2018, the city’s Economic Analysis Office said in a report to supervisors.
- San Francisco’s population grew from 767,067 in 2008 to 805,235 in 2010 to 883,305 last year.
- San Francisco added an average of 24,000 new jobs per year from 2010 to 2017. By the end of 2017, there were 716,900 jobs in San Francisco, 105,000 more than at the city’s previous economic peak in 2000.
- Median base pay rose 3.9 percent from 2017 to 2018 to $70,361, Glassdoor reported last October. That’s $17,000 above the national average.
“Obviously we’re in an incredibly different universe now,” San Francisco Supervisor Matt Haney said during an April 22 board of supervisors committee hearing.
Added Randy Shaw, executive director of the Tenderloin Housing Clinic: “Nobody thinks continuing the tax break is needed.”
$50.5 Million Saved
Many of the new companies that located in San Francisco chose mid-Market and the Tenderloin, two of the city’s most economically depressed areas, and took advantage of the break. An average of nine companies annually take the exclusion. Each company has an average 2,885 employees, the Controller’s office said.
The tax exclusion in 2014 and 2015 saved companies a combined $50.5 million. Twitter received “the lion’s share” of the estimated tax breaks of $34.7 million in 2014 and $15.8 million the following year, San Francisco Chief Economist Ted Egan told supervisors. Twitter went public in November 2013. Workers under the company-imposed lockout period had to wait until May 2014 to begin selling stock.
Twitter under a community benefits agreement with the city provided volunteers, donated computers and internet access equipment for schools, and provided free legal assistance for neighbors on housing issues. Much of the benefits focus on homelessness and socioeconomic disparities, specifically within the city’s Mid-Market and Tenderloin neighborhoods, a company spokesperson said.
“Twitter is committed to the San Francisco community, and we are doubling down on our efforts. While the CBA may be coming to an end, we will continue investing, partnering and working hard to make this community stronger,” a Twitter representative said.
The company’s focus areas are internet safety and education; equality; freedom of expression and civil liberties; universal access and adoption of technology; and crisis and emergency response. “San Francisco is our home, and we will continue investing,” the spokesperson said.
“We will never know whether the payroll tax exclusion was needed to retain Twitter in the City—only their CEO and Board truly know if they would have moved to Brisbane [Calif.] without it,” Donald S. Falk, Tenderloin Neighborhood Development Corp. CEO, said in an email. “But assuming it was, I think the direct impact was modest, and the jury is still out on the indirect impact.”
Tenderloin Neighborhood Development’s mission is to build affordable homes and supportive communities, with the majority of the people it serves earning $15,000 a year. The neighborhood’s income is nearly one third that of the average San Francisco income, the most recent American Community Survey said.
“The tax break brought more investment to the area from 2012-2019 than in the preceding fifty years combined,” Tenderloin Housing Clinic’s Shaw said in an email.
Other companies receiving tax breaks also provided community benefits.
Online dating company Zoosk Inc. took advantage of the break in exchange for providing internships, $10,000 to a neighborhood nonprofit, and tutoring, in addition to patronizing local restaurants and bars, its agreement said. Streaming service
Streaming music service Spotify supported volunteers and neighborhood arts under its agreement.
Architectural and engineering firm PAE Engineers Inc. likewise provided volunteers, grants, and put up guests in locally independently owned hotels under its agreement.
“In this case, it jump-started investment in two neighborhoods where investment had long languished despite the city’s overall economic boom,” Shaw said.
IPO, TNC Taxes
City leaders, after enjoying the economic strengthening, have shifted from giving tax breaks to raising taxes. San Francisco supervisors last year proposed an initiative to tax transportation network companies. Uber and Lyft worked with the city to get the Legislature to approve for San Francisco to seek voter approval for a 3.25 percent TNC tax.
“It’s a sign of a maturing industry,” said Supervisor Peskin.
Voters last fall also approved a Salesforce.com-backed initiative that imposes a 0.175 percent to 0.690 percent gross receipts tax on companies earning more than $50 million in revenue. Voters last June backed the Living Wage for Educators Act of 2018 that authorized a $198 per-parcel tax for education. And San Francisco last June approved a lease tax to fund early childcare and education.
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. The payroll tax now stands at 0.38%, as the phase-out hasn’t been completely revenue neutral. Last year 9,916 companies paid the payroll tax compared to 14,742 businesses paying the gross receipts tax, the San Francisco Controller’s annual report on business tax reform said.
A tax on stock-based compensation may make a return with a proposed initiative from Supervisor Gordon Mar.
His proposed 1.12% IPO tax may not help relations between the tech community and City Hall.
“Imposing new and potentially volatile taxes is not a good strategy for growing your economy or building fiscal resilience in the event of a downturn,” said Rufus Jeffris, Bay Area Council senior vice president. “The Twitter tax break unquestionably helped spur new investment and economic activity in a moribund, crime-riddled area of the city. It hasn’t solved all the problems, but it has helped create jobs, generate other indirect tax revenue and brought new investment to the Mid-Market area.”
The council represents 300 of the region’s biggest employers including Genentech, Salesforce, University of California, and Visa.
Mar should “engage in thoughtful dialogue about how to address the issues facing the city, rather than resorting to divisive politics and finger-pointing,” said Jennifer Stojkovic, executive director of sf.citi, the San Francisco Citizens Initiative for Technology and Innovation, a nonprofit that links the city’s technology community with policymakers.
The economy and taxes are cyclical, said Dan Kostenbauder, vice president for tax policy at Silicon Valley Leadership Group. The group represents large employers, including such heavyweights as Apple Inc., Facebook Inc., and Alphabet Inc.'s Google.
“Right now the economy is doing quite well. Solid years of low unemployment in the area. A lot of companies are doing well,” said Kostenbauder.
“That’s all very positive,” he added. “But it’s also clear that history is a pretty solid guide that we’re going to have cycles of upturns and downturns, and when we ultimately reach our next downturn, having in place high-cost structures and high tax rates are certainly factors that could get companies to reevaluate whether they want to stay here, particularly whether they want to grow here.”