San Francisco – To Be, Or Not To Be (Business Friendly)

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For those who don’t understand exactly how hostile to business geniuses who run the state of California can be, I saw a story yesterday that can highlight the problem. Here is a “problem” that is being wrestled with in San Francisco:

SAN FRANCISCO — In the shadow of San Francisco’s stately City Hall, sidewalks abound with transients, drugs and crime.

Now, anyone that’s been to San Francisco in the last couple of decades knows this is an understatement… It’s bad… It’s real bad. But THAT’S not the problem.

Into this neighborhood, Twitter is promising to move its headquarters, offering urban rebirth in exchange for a tax break. Mayor Ed Lee has proposed such an incentive plan, which comes up for a vote Tuesday.

But progressive politicians and the city’s largest public employee union call the proposal a poorly crafted gift to the rich.

You see, kids, in the world of the San Francisco Progressive, urban blight is not the problem, tax breaks are!

The plan would exempt Twitter from paying any new payroll tax on new hires. This could mean big savings as the company expands from hundreds to thousands of employees.

Some low-income residents worry revitalization will just lead to higher rents. And city employees facing contract concessions thanks to a massive budget shortfall resent what they see as a giveaway.

Economics lesson: If the company hires new people, and creates thousands of new jobs, that increases the revenue brought in on both income taxes and sales taxes resulting form more people being employed and, you know, buying stuff!

Here is an article from a Progressive businessman explaining why he thinks this exemption is nuts.

Now: I agree, we need to reform the business tax. We strongly supported Chiu’s proposal to replace the payroll tax with a gross receipts tax and a commercial rent tax (even though the Guardian is a commercial landlord and would have to pay that tax). It’s much more fair.

But this talk of the payroll tax being a “job killer” — and Twitter’s threat to leave town unless the company gets a tax break — boggles my mind. The payroll tax is a tiny, miniscule part of a San Francisco company’s expenses. I help run a small business in San Francisco. I have to make hiring decisions based on (tight) budgets, and I’ve had to do it for more than 20 years. And I can tell you, the payroll tax was never even remotely an issue. It’s not a “job killer;” compared to all the other factors involved in hiring in the city, it’s nothing, peanuts, birdseed.

First, Tim Redmond, the writer and editor of the paper, never mentions if the business he runs falls under or over the payroll tax requirement of 100 or more employees. But, for the sake of argument, lets say he does. He crunches numbers, and puts forth an almost compelling argument:

Say you’re a biotech company that wants to hire a new entry-level worker at a modest $35,000 a year. Can you afford it? Let’s cost it out.

There’s the salary, of course. Then there’s the 7.5 percent you’re paying in federal Social Security tax. That’s $2,626 more. And since you’re in San Francisco, you’re paying for health insurance; that’s probably between $2,000 and $4,000 a year, depending on the plan, but let’s peg it at the city’s minimum mandate, which is $1.09 an hour, or $2,267.

So now your $35,000 worker costs $39,893. Then there’s unemployment and disability insurance and workers’ compensation. The person’s going to need a desk and a chair, or a lab bench and a stool (and they have to be ergonomically correct), and probably a computer, a phone line, and software. And you’re going to have to spend some money on training. You’re going to offer a couple weeks of paid vacation, right? And you have to give sick days. So you have to account for the money you’re spending to cover your new worker when he or she isn’t working. If it all pencils out at less than $42,000, you’re doing well.

Oh, wait, I forgot — there’s the damn city payroll tax. That job-killing factor that could make the difference between hiring and not hiring. Better account for that; it could be a deal breaker.

Are you holding your breath? Ready for the ax to fall? Here you go: the payroll tax on your new hire is a whopping $525 a year. About $10 a week. You probably spent more on the help wanted ads.

Payroll tax data is confidential, but it’s not hard to make rough estimates. Twitter has abut 350 employees now, and if they make an average of, say, $70,000 a year (reasonable in a high-tech firm), then the company payroll is about $24.5 million a year, and the city’s 1.5 percent tax comes to $294,000.

Even if Twitter doubles its workforce, the amount it would save with the city’s proposed tax break is only about $300,000 a year (the cost of two or three high-end employees out of the 350 the company wants to hire). If Twitter moves into the 200,000-square-foot space it’s eyeing in Brisbane (sharing an office, reports say, with Walmart — how cutting edge!) and pays $25 a square foot in rent (probably low for nice office space), rent alone will be $8 million a year. Then there’s the cost of all those workers driving (or taking a private bus) to a location badly served by transit. The payroll tax liability in San Francisco is tiny in comparison.

He ends the piece by stating:

Twitter would probably be paying more for the moving vans to haul its gear to Brisbane than the payroll tax it’s going to save. If it follows the likes of Genentech and Google and pays for fancy buses to transport its employees, the cost will make the payroll tax seem cheap. And if Chiu’s reforms ever become law, and there’s a commercial rent tax, and Twitter’s landlord passes it on to the tenants (likely), then guess what? Twitter’s taxes are going to be way higher anyway.

That’s why I think this is bullshit. It’s got nothing to do with Jane Kim or Randy Shaw or any of his political garbage. It’s simple economics. Twitter is jacking up the city for a tax break that will cost San Francisco money — but won’t be even a teensy weensy factor in job creation.

“Twitter is jacking up the city for a tax break that will cost San Francisco money”…

OK. Just how much money are we talking about? According to the New York Times, the City of San Francisco has a 6.6 billion dollar budget. And the amount that is contributed from the payroll tax, as the Progressive writer says… “Are you holding your breath? Ready for the ax to fall? Here you go“: $350 million! Out of $6.6 billion! That is the total for all businesses operating in San Francisco!

Mr. Redmond notes that: “the payroll tax on your new hire is a whopping $525 a year. About $10 a week. You probably spent more on the help wanted ads.”the payroll tax on your new hire is a whopping $525 a year. About $10 a week. You probably spent more on the help wanted ads”.

You spent $525 more if you’re hiring ONE employee. But Twitter is talking about expanding its work force from about 300 to 3000! Lets do the math. If Redomnd calculates each new hire would cost $525 per hire, and we’re estimating that Twitter wants to hire approximately 2,700 more workers… 2,700 X 525…. =… That would be $1,417,500 Twitter would pay out in new payroll taxes. That is NOT “nothing, peanuts, birdseed“. The tax break Twitter wants, which would affect all businesses, would, in effect, prop up the city by adding all sorts of extra revenue to the tax stream coming into the government coffers!

Jacking up the city“????? He conveniently skips over the benefits he himself mentions – $8 million dollars in new rent revenue, the hiring of moving vans, hiring expensive buses to transport workers, Then there are the incalculables like increase in house sale / rentals for the new employees, increased commuting to the area, which will help bring more foot traffic to the businesses in the area.

“won’t be even a teensy weensy factor in job creation”

Though you don’t like the rational for the decision, if they decide to relocate elsewhere based on this ONE factor, then, sorry, it was a “teensy weensy factor” in the lack of jobs creation. Even the director of the city’s Office of Economic and Workforce Development sees the wisdom in scrapping the payroll tax. From the Times piece:

Jennifer Matz, director of the city’s Office of Economic and Workforce Development, said that the payroll tax was a disincentive for businesses to grow in San Francisco. The city approved a payroll tax break for biotechnology companies seven years ago, and Ms. Matz said it had helped attract dozens of biotech start-ups.

“This tax is particularly ill-suited to the new wave of businesses that we are trying to make the center of our economy,” Ms. Matz said.

Mr. Redmond, please note the effect the payroll tax break had on the biotech industry in San Francisco. Also note that the guy who proposed this exemption, David Chiu, President of San Francisco’s Board of Supervisors, is the former COO of a successful internet start-up, and knows more about the hiring practices of this new breed of company than a newspaper editor.

We can’t forget that the San Francisco area already has some of the highest sales tax rates of any area in California. And, to make matters potentially worse, because of changes in the Federal tax code, San Francisco’s start-up industry may come to a grinding halt. They have a law on the books that requires requires companies to pay a payroll tax on gains from employee stock options, a commonly used strategy by small growing high-tech businesses to squeeze the most out of the money being made to grow the business.

So, what will it be San Francisco – pursuing tax policy (proven to work via the bio-chem tax breaks) that fosters business expansion, economic growth, and ultimately righting the economic ship of the city, or continuing down the road that led Detroit to become… well… Detroit?

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PS. I have a spark of hope that the folks in San Fracisco get it, they’ll make the right decision. But then I see something like this

Who are the (Twitter) investors?” Supervisor John Avalos told The San Francisco Examiner. “Probably some of the wealthiest people in this country. And we are giving them more wealth.”

Last Tuesday, members of a neighborhood group protested outside Twitter’s current headquarters, about a mile from the proposed new offices.

They accused Twitter of not living up to its pledge to be a good neighbor. They complained neither the city nor the company have considered the low-income residents who would be adversely impacted by rising rents spurred by the prosperity Twitter could bring.

“The residents are feeling that if they’re not going to benefit from this revitalization that the city is pushing for, it really doesn’t make sense for these companies to stay in San Francisco,” said Angelica Cabande, director of South of Market Community Action Network.

…and realize that the forces that ant the status quo are still a powerful force in bay area politics. And here is what is on the line:

City economic officials paint any failure of the deal not as a loss to Twitter but as a loss for the neighborhood, where more than half of the available commercial real estate sits vacant. While Twitter is the big fish the city is seeking to catch, any businesses within the geographic zone defined by the legislation would get a similar tax break.

And yet Progressives still want to squash the deal… Sigh.

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