The prospect of losing Twitter, one of technology’s fastest-growing companies, has exposed a bigger problem — San Francisco’s broken business tax structure. If The City had a business tax structure that worked, we wouldn’t need special one-off deals to keep good companies from leaving.
The Twitter tax deal currently being debated by the Board of Supervisors is well-intentioned. Its supporters deserve credit for a proposal to save jobs and bring an expanding young company to an underutilized area on a major transit corridor. Worthy objectives all; they’re exactly what we should work to accomplish.
But the fact that city leaders have been prompted to craft this narrow tax break speaks volumes about more-serious problems with our local business taxation scheme.
Whatever happens with the Twitter deal, it has highlighted a priority San Francisco can no longer afford to ignore: We need to replace our business payroll tax with something fairer that creates jobs.
Next year, the mayor, supervisors and other stakeholders should convene a tax summit to reform San Francisco’s taxation and revenue policy with two guiding principles: fairness and job creation.
The summit should focus on getting a reform proposal to voters for the November 2012 election. That’s plenty of time for input from citizens, economists, labor and employers — including employers from outside San Francisco we’d like to attract here. It reflects the urgency of a problem we need to solve. And it will allow all ideas to be considered, so long as we adhere to the principles of fairness and job creation.
If we enact a better business tax, we’ll have a city that works. If we can’t, local government will continue to present choices between bad options and worse ones. Those are the stakes.
A tax summit would allow us to assess larger policy details and economic impacts missing from the current debate, and move discussions from back rooms to an open public forum. In the nearly 10 years I’ve been city attorney, my clients have included three mayors and 25 supervisors. I’ve seen what works and what doesn’t. Closed-door decision making, overly prescriptive proposals and a “my-way-or-the-highway” approach won’t work. But a tax summit will.
Our current faulty business tax partially owes to out-of-town corporations that sued years ago to lower their own taxes. They identified legal vulnerabilities in our dual payroll-gross receipts structure, and cost taxpayers tens of millions in refunds and lost revenue.
Now San Francisco levies a 1.5 percent tax on the payroll of most companies with a payroll of more than $250,000. We’re the only California city to base its entire business tax on payroll. For a variety reasons, only about 8,000 city businesses pay the tax — out of the some 80,000 registered businesses. This narrow tax base puts a wildly disproportionate burden on the roughly 10 percent of businesses required to pay the tax, which is especially tough for small businesses first crossing the $250,000 threshold. The tax bears little correlation to businesses’ ability to pay, and even less to their comparative use of public services.
But the current tax isn’t just unfair to businesses. It’s also unfair to workers and their families.
Economic analysts have estimated that our current business payroll tax depresses employment in San Francisco by 1 percent, by driving up costs to hire more workers. For some real-life perspective, that’s about 5,500 jobs that would otherwise be available to unemployed and under-employed San Franciscans right now. Economists also blame our business payroll tax for depressing wages — which, in turn, depresses local spending.
If a Twitter tax deal is truly what it takes to save jobs and keep a homegrown success from leaving San Francisco, then let’s get it done. But we should do everything we can to add protections, and make it a stopgap until we achieve real business tax reform over the next 18 months.
But let’s not kid ourselves that ad hoc tax breaks are sound tax policy. And let’s not kid ourselves that our business payroll tax is sound either. We need real tax reform based on fairness and job creation. That’s not just a deal for Twitter to like, but something we’ll all be glad to tweet about.
Dennis Herrera is a candidate for San Francisco mayor. He has been the city attorney since 2002.