San Francisco loses by being only city to tax stock options 

Over the past two months, City Hall has been buzzing with a relatively high-profile debate about Twitter, and whether we should use payroll tax incentives to encourage the company, along with other businesses, to relocate to the blighted Mid-Market and Tenderloin neighborhoods. I was a proud co-sponsor of this legislation.

What the Twitter debate uncovered, however, was the fact that San Francisco is the only major city in the United States that taxes stock options — a practice that is now threatening our vibrant technology community. Today, San Francisco requires employers to pay a 1.5 percent payroll tax on the full value of restricted stock grants, and the full spread of stock options between the fair market value and strike price.

So what’s the big deal?

Here’s the problem: Stock options and other forms of stock-based compensation have become a staple of how technology and many other companies recruit and retain employees. When you consider that many of San Francisco’s most successful young technology companies, such as Twitter and Zynga, have estimated that once public, their annual tax bill in San Francisco relating to stock options alone would reach $50 million, the severity of the problem comes into focus.

In early April, along with Mayor Ed Lee and a number of my colleagues, I met with a number of leaders in our local technology industry about this issue, and this message was loud and clear: Though they are committed to stay in San Francisco, grow their companies locally and continue to hire San Franciscans, they cannot afford to stay in San Francisco if it remains the only city in the United States to tax their stock-based compensation. They will simply move away.

I believe it is our responsibility at City Hall to create a competitive and sustainable economic environment — if we want to continue to attract young technology companies to San Francisco, and the jobs they create for our residents and ancillary taxes they contribute into our economy, we cannot ignore this problem any longer.

Therefore, on April 19 I introduced legislation to specifically exempt stock options and other forms of stock-based compensation from our payroll tax. I have worked in the technology area for years — while our current payroll tax structure is a major problem, it can be solved relatively easy and in short order.

I ran for supervisor to focus on long-term solutions — to create a vision for the future of our city. Right now we have a unique opportunity to grow into the capital of innovation for the entire technology industry, but first we have to level the playing field. It is the future of San Francisco.

Mark Farrell is a first-term member of the San Francisco Board of Supervisors.

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