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As Silicon Valley Cities Move to Tax Tech, San Francisco Holds Steady

Mountain View’s city council recently placed a business tax aimed at Google on the November ballot. The move could generate $3.3 million in revenue for the city each year.

(TNS) — As fast-growing tech companies strain housing, transportation and other civic resources, cities are pushing to increase their taxes. There’s one exception: San Francisco.

Last week, Mountain View’s City Council placed a business tax on the November ballot that would disproportionately affect one major employer, Google. If voters approve it, the tech giant will pay an estimated $3.3 million per year, more than half the $5.9 million in annual revenue Mountain View expects from the tax.

Other Silicon Valley tech hubs such as Palo Alto, Menlo Park and Sunnyvale are contemplating their own new taxes and fees.

San Francisco has gone in a different direction, with policies that have largely helped tech and increased taxes on other industries like real estate, according to city data.

In 2012, as unemployment remained high, voters passed an initiative to phase out the 1.5 percent payroll tax in favor of a gross receipts tax that covers more or less all corporate income. The idea was to expand the number of businesses paying taxes and not discourage companies from hiring.

“The net effect is moving from a job-killing payroll tax,” said Ted Egan, San Francisco’s chief economist. “It creates jobs, and that creates revenue.”

The gross receipts tax varies by revenue and sector, with companies making over $25 million paying the highest rates; in 2017, the highest marginal rate was under 0.5 percent. Since 2012, that rate has risen as the payroll tax rate falls, a system meant to keep city revenue level.

As of 2016, when the payroll tax had been cut by nearly half and gross receipts taxes raised accordingly, nearly 4,000 more businesses paid the gross receipts tax than paid the payroll tax, according to an October city report, indicating it had broadened the city’s tax base.

Hotels, construction companies and commercial landlords pay more under the gross receipts taxes than under the payroll tax. The information sector, which includes many tech companies, stands to benefit from the shift to gross receipts. In 2016, information companies paid 25 percent of the city’s payroll taxes, but only 17 percent of the gross receipts tax.

The payroll tax was set to be replaced entirely by the gross receipts tax this year, but gross receipts revenue hadn’t risen enough to fully replace payroll revenue. Around a third of the original payroll tax will remain this year, with an estimated rate for the city fiscal year that started Monday of just under 0.45 percent.

Efforts to boost San Francisco’s taxes on tech companies have yet to move forward. A 2016 proposal from then-Supervisor Eric Mar was rejected in a subcommittee and failed to reach the ballot.

In San Francisco, a group called Our City Our Home is collecting signatures for a November ballot measure that tacks on an additional 0.5 percent gross receipts tax for companies with $50 million or more in revenue. That would hit, among others, city tech companies such as Salesforce, Twitter and Yelp; retailers Gap and Williams-Sonoma Inc.; utility Pacific Gas and Electric Co.; and financial firms such as Wells Fargo and Charles Schwab.

Other tax proposals in West Coast tech hubs have seen setbacks. Cupertino considered a per-employee tax that would affect mostly Apple — but tabled discussion until next year. Seattle passed a business tax in May against Amazon’s vocal opposition, and then revoked it last month after business groups threatened to push forward a referendum to repeal it.

For now, San Francisco’s commercial landlords are the only businesses facing a targeted tax hike. In June, voters narrowly passed Proposition C to create a rent tax of 3.5 percent on office buildings and 1 percent on warehouses, which will raise $146 million a year for child care and early education.

Real estate and business groups have said the new costs will be passed onto tenants and hurt the economy.

Prop. C was written without any input from businesses, said Jim Lazarus, senior vice president of public policy at the San Francisco Chamber of Commerce, which opposed the measure.

In contrast, the 2012 measure that phased out payroll taxes was a “cooperative six-month negotiation,” Lazarus said. “We came up with a ballot measure that everyone supported.”

As the Bay Area grapples with infrastructure and civic woes, large companies are increasingly attractive targets for more tax revenue, said Jesse Rothstein, a professor of public policy and economics at UC Berkeley.

“Local governments, particular in California, are really constrained in their revenue sources,” he said.

Prop. 13, the landmark 1978 ballot measure, limits city and county property taxes increases to 2 percent a year. In the past, cities have pushed for construction of shops to capture more sales taxes, Rothstein said. But cutbacks and bankruptcies in the retail sector because of online shopping have made that an uncertain source of revenue, and places like Mountain View may not be suitable for large retail, he said.

Rothstein doesn’t believe local taxes have had a major impact on hiring decisions to date.

“The change from 2011 to 2018 is more the business cycle and more that tech is booming and not specific tax changes,” Rothstein said. “In general, you’d expect a payroll tax is not the best thing for job growth. If you can shift off from that, you can get some increase in jobs or some wages.”

But targeted efforts such as the Mid-Market payroll tax break, sometimes called the “Twitter tax break,” which eliminated payroll taxes for some businesses in the stretch of Market between Fifth and 11th streets, appears to have lured employers to the area, Rothstein said.

Twitter has benefited from a tax exemption set to expire next year.

Lazarus from the Chamber of Commerce agrees. “Those buildings were all empty. Now they’re virtually full,” he said of the Mid-Market area. The Mid-Market tax exclusion is set to expire in May 2019.

Larger companies can bear higher taxes, Lazarus said, but smaller companies may be less able to afford them.

But the rising economy, said Rothstein, the Berkeley professor, has strengthened cities’ hands.

“It’s easier for the city to take an oppositional stance when it’s not begging” companies to create jobs, he said.

©2018 the San Francisco Chronicle Distributed by Tribune Content Agency, LLC.