San Francisco Business Tax 2.0

San Francisco took one step forward in creating a more business-friendly city this week with the passage of the Mid-Market Payroll Tax Exclusion. The Chamber-supported incentive will help bring growing businesses to one of the city’s most blighted areas by providing a six-year payroll tax exemption for new hires at companies locating in Mid-Market and targeted areas of the Tenderloin. While the incentive will surely help revitalize a long-neglected area of the city, it is just one step in a much boarder effort that is needed to retain and attract businesses – and jobs – in San Francisco.

Re-examining the city’s business tax should be a top priority. San Francisco is one of only a few cities in America that taxes employee stock options once exercised. The 1.5 percent tax is levied on employment activity in the city for a business with a total San Francisco payroll in excess of $250,000. The tax applies to salaries, wages, bonuses, stock options, commissions and all other forms of compensation issued in exchange for services.

Critics have long cautioned that San Francisco’s tax structure is inequitable and a disincentive to job creation. There is some truth to both arguments. Under the current system, only about 10 percent of the city’s businesses pay the tax. And for some businesses, adding the tax can make or break a hiring decision, particularly in the current economic climate.

Recently, criticism over the city’s payroll tax has shifted to its application on stock options. The issue made national headlines when Twitter considered a move outside the city limits to overcome the millions in local tax liability it could face if it goes public. The Mid-Market Tax Exemption solves the issue for Twitter – which plans to move to the San Francisco Mart building to qualify for the incentive – but the threat remains for many other fast-growing technology companies on the road to an IPO. Job-creators like Yelp! and Zynga have been quick to echo the concerns and are now encouraging the city to consider a broader incentive.

In response, Mayor Ed Lee and the Board of Supervisors are pursuing multiple legislative solutions. Supervisor Mark Farrell introduced legislation to permanently exempt stock options from the payroll tax. Supervisor Ross Mirkarimi has proposed a two-year tax moratorium on the stock option tax. Board President David Chiu is also drafting business tax legislation and City Attorney Dennis Herrera has called for a “tax summit” to put a reform measure before voters.

These “quick fix” measures may help San Francisco appease technology companies in the short-term, but a broader, long-term solution is still needed. This week, Mayor Lee convened the first task force meeting of technology company officials to analyze the impacts of the city’s tax structure and provide perspective on other quality of life issues such as housing, transportation, and technology infrastructure. This is a good first step, but this conversation should be expanded to include many other businesses – large and small, from a variety of industries and located across the city.

Amidst all the debate, some things are clear. No solution will be equitable to all stakeholders. Any change to the current tax system will have winners and losers. We can expect both to be vocal in their support and opposition. In the months ahead, the Chamber will continue to work with our members and city officials to ensure all businesses have a voice in the discussion and advocate for solutions that best help to attract and retain business in San Francisco.

We are fortunate that companies like Twitter, Yelp! and Zynga want to do business here. The Chamber applauds Mayor Lee, Board President David Chiu and Supervisor Jane Kim for their leadership in passing the Mid-Market Tax Incentive and we support current efforts to address the tax on stock options. Now, it is time for all of us to roll up our sleeves and focus on a broader strategy that ensures San Francisco is an attractive place for all businesses – not just start-ups and those that move to Mid-Market.

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