Sarah Lacy on the City of San Francisco’s Insanity

by Reihan Salam

That is perhaps an ungenerous way of putting it, but Sarah Lacy of TechCrunch explains the stakes of a debate that’s unfolding today in the City by the Bay:


As a refresher, the problem here isn’t whether startups should be immune from paying city taxes. Many of them– like TechCrunch– are happy to pay taxes to San Francisco. The problem is the way San Francisco taxes companies, using a payroll tax that no other city in the state uses. That’s for good reason: It disincentives startups to get big and hire more people. And, as we first reported in February, San Francisco may be the only city in the United States that can legally extend this payroll tax to stock options.

This is more than a mere “disincentive” for pre-IPO companies to stay in San Francisco; it means they can’t stay and uphold their fiduciary duties. Going public from San Francisco could cost companies like Twitter, Zynga and Yelp as much as half of the IPO proceeds in taxes. Again, it’s a tax the Federal government doesn’t levy on startups, and one that no other city in the United States levies– particularly those smaller cities that are just a few miles from Twitter’s current headquarters.

Lacy goes on to explain that the objection from “corporate welfare” is legit. Tech companies shouldn’t be singled out for special treatment:


Still, there’s a lot of groups in the city lobbying against any change in taxes, confusing the issue with “corporate welfare.” I’ve read through some of the materials they are sending out, and while a lot of this is politics, there seems to be a lot of genuine confusion between the nature of the way big companies, small businesses and startups work.

One landed in my inbox from the Service Employees International Union yesterday. The union opens the letter saying a tax break of $20 million to one company is outrageous. I don’t necessarily disagree. And that is one reason why it’s so important that San Francisco change its payroll tax to a system more in line with what every other city in California uses. As long as such a geographically small city is so out-of-step with its neighbors, the bulk of high-growth companies– like Yahoo, Google and Facebook– will start in other areas of Silicon Valley, and those who do start in San Francisco and get huge will demand an exemption to stay. Because the laws are so outrageous compared to neighboring cities, the way to avoid this situation in the future is to change the tax permanently.

I’m not advocating letting companies off the hook for taxes: Just the levying of ones that make sense and don’t put the city at a huge competitive disadvantage. If this were the case today, Twitter would have no argument. The San Francisco Planning and Urban Research Association has an excellent editorial today that argues this point as well.

What our friends at SEIU don’t seem to understand is that San Francisco isn’t the only game in town. Brisbane has its charms, as does Buenos Aires. Moreover, there are smarter tax policies that would yield more revenue by attracting more firms and more talented workers. San Francisco’s density and quality of life give it an edge that it shouldn’t squander through needlessly complex and punitive tax policies.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.