San Francisco tech rallies around startup-friendly tax measure Prop E

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San Francisco residents will have the option of voting next Tuesday on Prop E, a proposal to eliminate the existing city payroll tax in favor of a tax on revenue. It’s an issue that’s received widespread approval and support from the tech community and re-ignited the conversation about keeping startups in the city.

San Francisco Mayor Ed Lee gives remarks at the Greenstart event.

San Francisco is currently the only city in California that taxes companies based on their payroll, an unpopular move among fast-growing tech companies that might double or triple their staff sizes in a single year without producing significant revenue, and some feel they might have to consider moving south where they won’t face a similar tax. Up for a vote on Tuesday, Prop E would replace the payroll tax with a tax on a company’s gross receipts over $1 million.

For tech companies, staying in San Francisco versus moving down to Silicon Valley is a tough decision, and one that’s tipped in San Francisco’s favor recently with companies like Twitter, AirBnB, and Pinterest setting up camp. But those companies tend to grow rapidly, and if they’re to remain in the city they could prove a serious lobbying force in city government for their particular interests.

The San Francisco Chronicle explained the potential economic impact of the change, noting that it would benefit tech and manufacturing companies, who complain they’ve been unfairly burdened by the existing tax structure:

If passed, Prop. E would phase out the payroll tax over five years starting in 2014. It’s designed to raise the same amount of tax revenue as the payroll tax but almost double the number of businesses that are paying. It’s also expected to generate an additional $28.5 million a year for city coffers from increased business license fees. The city currently levies a 1.5 percent tax on companies with at least $250,000 in payroll expenses. It’s the second biggest source of revenue, behind only property taxes, for the city’s General Account, bringing in $410 million last year.

Prop E is backed by SF Citi, the group that advocates on behalf of local tech companies in San Francisco, both the local Democratic and Republican parties, and Mayor Ed Lee, who’s been a cheerleader of pro-tech legislation, like tax breaks for companies such as Twitter that moved into the mid-Market area of downtown San Francisco this year. Lee is leading a rally on Saturday in support of Prop E, in conjunction with SF Citi.

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I held no position on prop E. The question I want to ask is does it really matter to tech? Or is 1.5% payroll tax largely inconsequential?

So much was said and done about the Twitter tax break. Does it truly matter to tech? It looks like the tax exemption so far mostly benefit one single building – that is the SF Mart where Twitter is located. Next door to Twitter, the large real estate deal signed by Dolby on one side and Square on the other side are both outside of the tax exemption zone. Dolby tell the truth about the tax. “A payroll tax exemption was not part of our motivation — we just believe in the neighborhood”.

Vast majority of tech companies in San Francisco do not find this worth their while. Startups are not flocking to Tenderloin just because of the tax break. As the deal signed by AirBnb, Dolyby or Square tells us, if their business is growing and the real estate is desirable then they will come, tax or no tax.

The other mythology is tech companies tend to move to Silicon Valley as they grow. This was heard so many times that people just accepted it as an unexamined truth. Yet I’ve great difficulty to actually come up with a list of growing tech companies who have actually done so. The contrast is especially stark when you consider the huge number of startup coming to San Francisco despite the negative reputation cited. This tell me that some times people people are drawing a very wrong picture when it comes to the competitiveness of San Francisco for tech.

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