Proposed IPO Tax Seeks Equitable Fix to Tech Domination

San Francisco is no longer in a position to cut taxes to accommodate tech companies amid a wealth inequality crisis, one supervisor says.

A much-anticipated influx of wealth is expected to further inundate San Francisco and this time, one supervisor is ready to divert some of it to city services.

Amid a series of expected San Francisco-based tech IPOs, Supervisor Gordon Mar on Wednesday proposed a 1.12 percent payroll tax on stock-based compensation. That would boost the total payroll tax to 1.5 percent — returning to the rate before 2012 — to a fund that addresses the impacts of income inequality.

Mar expects to introduce the measure to the Board of Supervisors in May, which would need to approve it with six votes before landing on the November ballot. If it passes with the needed two-thirds majority, it would represent a stark pendulum shift. In 2012, voters encouraged by the late Mayor Ed Lee agreed to reduce the same tax in favor of a gross receipts tax to keep tech companies who threatened to leave town in the aftermath of the Great Recession.

The new tax would retroactively take effect in May, before several IPOs, or initial public offerings, occur. Lyft and Pinterest recently went public while Uber, Slack, Airbnb, Postmates, and Cloudflare are among other tech startups in San Francisco expected to do the same this year. As employees have the chance to cash in company-provided shares once public, IPOs are tied to higher home prices in the months and even years after.

“We have seen the aftermath when major start-ups go public before,” Mar said at the Budget and Finance subcommittee hearing on Wednesday. “Over the last decade, we have seen an incredible amount of wealth flood this city, wealth concentrated in the hands of too few, as our middle class shrinks and wealth gap grows.”

Mar called a hearing last month to examine the projected impacts. Conservative estimates from the budget analyst presented Wednesday found that each IPO could increase house sales by 1.8 percent. With at least six IPOs, that amounts to a cumulative 11.3 percent cost increase. As of February, San Francisco’s median home value stands at $1.3 million.

But not every IPO will have the same impact. Where Slack is valued at $7.1 billion with 750 employees in San Francisco, Uber is valued at $100 billion with an estimated 8,000 employees in San Francisco. It’s also difficult to tell how the stocks will be valued in the future, as they can fall flat later, or when employees will act on this newfound wealth.

What is clear is the undeniable line drawn from this proposed stock-based compensation tax to what’s known as the Twitter tax break. The city is estimated to have lost $40 million over two years, surrounding its 2013 IPO, Mar said.

Much like the Google buses, the 2011 Central Market Exclusion Act — known as the Twitter tax break — has come to represent a larger anger toward the city’s accommodation of the tech sector in its early days that has helped lead to a proliferating wealth gap, displacement, inadequate city services, and congestion. 

“This happened, at least in part, because of decisions made in this chamber and in this building to grown the tech sector,” Mar said. “When they threatened to leave, we paid their ransom. We cut their taxes, built their offices and luxury condos, and here we are.”

Between 2010 and 2017, the population added 79,000 people, just 13,000 housing units, and the median house price increased 60 percent to $1.2 million. But it’s not merely a housing-induced affordability crisis.

During the same period, there was an 11 percent decline in households earning less than $35,000 and a 94 percent increase in households earning more than $200,000, according to the budget analyst’s report. Simply put, the city’s poor and middle income are leaving and the wealthy are moving in.

Dozens of public commenters denounced the impacts of this change, calling for a legislative fix to San Francisco’s woes. While Mar understands the circumstances of the recession, he firmly believes 2019 is past time to rectify past board decisions — and feels tech businesses are ingrained in San Francisco to not leave en masse for a return to the old tax rate.

“It’s time we turn the page on trickle-down policies of the past,” Mar said. “It’s time we ask wealthy corporations to start paying their fair share.”

Mar expects to bring the proposed measure to his Board of Supervisors colleagues in May.

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