Jul 16, 2019 9:00 AM

No More Deals: San Francisco Considers Raising Taxes on Tech

In 2011, San Francisco cut taxes to lure tech firms. Eight years later, gaping income inequality has city officials looking for ways to get tech to pay its share.

view of salesforce tower seen from above in San Francisco

At a recent postmortem for the so-called Twitter tax break, the divisive San Francisco policy that drew tech companies to a beleaguered stretch of downtown, the tone at City Hall was chilly. Tech offices---the likes of Twitter, Zendesk, and Uber---had indeed arrived as promised, but residents of the city’s Mid-Market neighborhood told officials that little uplift came with the logos. “I’ve seen the number of people who are sleeping on the street increase. We’ve seen a lot of displacement … affordable restaurants close,” said Sam Dennison, a local resident who served on a citizen advisory board for the tax break. “We felt like we were going to be annihilated, and in a lot of ways we weren’t wrong.”

In the exasperated sighs of local politicians, the message was clear: There’s no way we’re doing that again.

Never say never. In 2011, when the Twitter tax break passed, San Francisco was in a post-recession push to increase tech’s footprint in the city. Mayor Ed Lee was defending tech workers as “not robots” in The New York Times, and enthusiasm for the industry’s restorative powers was high. In Mid-Market, economists predicted software companies would bring new life to an area known for intractable drug abuse and homelessness. If it had, there was scant data to prove it; the measure had been approved with few accountability measures in place. Today, the area’s changes are hard to untangle from the transformation of the city as a whole---a case of runaway inequality given a booster shot by city policies. “We're just a particularly good fishbowl to observe the problem,” Dennison tells me after the hearing.

How the pendulum has swung. The city’s recent surge in wealth is legendary, and so too is its growing chasm between rich and poor. It’s gotten dystopian out there---even the techies themselves are saying it. This year, that silicon tide is cresting with a parade of IPOs that will mint riches for employees at the likes of Uber, Lyft, Slack, and, potentially, Airbnb. If the real estate agents are to be believed, the rest of us will soon drown in the melt of ice swans discarded after multimillion-dollar condo showings. (Bring cash, nouveau riche!) The resulting local techlash has made the industry a shiny political target. As the Twitter tax break, which expired in May, fades into memory, elected officials have adopted a boomtime mantra: Pay your share.

Three tech-focused tax proposals have emerged this year: a per-ride levy on Uber and Lyft rides; a so-called IPO tax to increase the rate on stock-based compensation; and a tax on companies based on the ratio of their CEOs’ pay to ordinary employees. Each would fund programs intended to alleviate social ills seen as inflamed by the growth of big business. The proposals, which have been made by members of the city’s Board of Supervisors, come on the heels of a citizen-led initiative last year, Prop C, that increased a tax on some businesses to fund city homeless programs.

“A lot of these problems have been exacerbated by the tech boom, from affordability and gentrification to homelessness and gridlock on our streets,” says Supervisor Gordon Mar, sponsor of the IPO tax proposal. The measure is estimated to raise $100 to $200 million over its first two years. “As a city, we rolled out the red carpet for tech companies.”

To critics, the proposed taxes represent a worrying pattern---a chaotic jumble that will chip away at industry bottom lines and inflate a bloated city budget. That could also jeopardize the programs the taxes are intended to fund by providing volatile revenue streams that, like desert arroyos, flood or run dry depending on the business climate. “We oppose policies that are patchwork,” says Jennifer Stojkovic, executive director of sf.citi, which represents many of the city’s tech firms, including Lyft and Airbnb. “We have a serious issue with every six months there being a new election and new taxes.” The three proposals, if approved by the supervisors, would appear on the ballot this fall and next spring.

San Francisco’s tax-by-ballot oddness is the result of Prop 13, a 1978 initiative that limited the ability of local governments to increase property tax rates. It also required new taxes be approved by a two-thirds popular vote. That sets a high bar. So, how do you get your pet initiative approved by voters? These days it’s good marketing to demonize big tech, says Jason McDaniel, a professor at San Francisco State University who studies the city’s politics. “Progressives like to focus these proposals at tech because it provides a populist message. They can easily identify the villain for voters.”

In practice, the proposals aren’t actually all that tech-focused, McDaniel points out. Thanks to the high salaries of tech worker bees, the CEO tax would mostly affect banks. And the IPO tax, which restores a levy on stock-based compensation that was slashed in 2012, would affect anyone who gets paid in stock. That includes employees at places like Wells Fargo, not just the recent IPO holders like Uber and Slack. Mar says he’s open to narrowing the scope to only those newly public companies. But limiting the tax to IPOs could make its revenue even more unpredictable.

There is some precedent for all this in Prop C. Last year, things got ... personal. That was most evident in the showdown between Salesforce CEO Marc Benioff, a Prop C supporter, and Twitter’s Jack Dorsey (mostly taking place on, of all places, Twitter). That was unusual, McDaniel says, in a city where tech has little tradition of getting deeply involved in tax policies. When tech companies weigh in on public policy, he says, it tends to be over more existential issues such as proposals that strike at a company’s business model. Take Airbnb’s 2015 fight against restrictions on short-term rentals in San Francisco. Or the current battle in the California legislature over the classification of drivers for Uber, Lyft, and Postmates.

Prop C offers another cautionary tale. The homeless tax is sitting in limbo over a dispute about the two-thirds requirement. In the meantime, San Francisco can’t touch the revenue. The city plans to allow companies to pay the tax voluntarily, so Jack and Marc can both have their way.

There are signs that the current round of proposed taxes could ultimately be less explosive. Uber and Lyft have publicly backed the ride-share measure, which would add a 1.5 to 3.25 percent surcharge to each ride. Mar says meetings with tech companies about potential uses for the proceeds of the IPO tax have been productive. That includes the delivery company Postmates, which is gearing up for its IPO. Vikrum Aiyer, Postmates’ vice president for public policy, says the company supports Mar’s goal of funding programs that reduce inequality, but is evaluating whether the IPO tax is the right vehicle to do so. “Having a sustained resource is important,” he says. Other companies in the IPO pipeline declined to comment.

The recent proposals could also become bargaining chips to get more tech companies to the table, says Thad Kousser, a professor of political science at the UC San Diego. Already, some in city government are trying to pull back from the scattershot tax method. Mayor London Breed recently proposed a comprehensive review of how the city handles gross receipts taxes---a response to complaints that changes in 2012 shifted the tax burden in big tech’s favor. Such an overhaul has long been discussed, and is the preferred course of action by groups like sf.citi. Soon after, the sponsors of the CEO tax pushed their proposal from the November ballot to March 2020, though Mar says he still intends to push for a fall vote on the IPO tax.

Still, even Mar admits ballot measures that tax tech to fund specific city services won’t reduce inequality long-term. San Francisco has become an epicenter for the tech industry on its own accord. Many of the companies that set up shop in the city aren’t even based here: It’s Facebook leasing a new office tower or a startup opening up a satellite office to give young workers the option of city living. And while tech companies might dangle the possibility of leaving because of this or that tax or policy, they haven’t usually followed through, says Kousser. “They don’t want to move away from the venture capital and the engineers,” he says. “This is just another cost of doing business in a very expensive place.”

That is, of course, if the broader economy keeps cooperating. As Kousser puts it, the risk of targeting a patchwork of taxes on wealth is that even a slight tightening of belts during the next recession could cripple revenue: a company decides to rein in its CEO pay just under the limits of the tax, or the IPO train comes to a halt. “Hating on companies like Google is a luxury you can only afford when the economy is booming,” he says. San Francisco, ever a city of booms and busts, always needs to be ready when the good times stop rolling.