Stock option tax a way to lose city business

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A positive side effect of the Twitter payroll tax holiday bill is that it opened a window on the issue of San Francisco’s uniquely high tax and regulatory burden on businesses. With hundreds of The City’s companies now demanding to know why they aren’t entitled to tax breaks also, City Hall can no longer maintain its traditional treatment of local employers as piggy banks for the general fund.

Right now, the spotlight is shining particularly brightly on San Francisco’s stock option tax, which most companies weren’t even aware had been on the books since 2004. Reportedly, no other city in the nation imposes such a tax. But in typical San Francisco tax-commerce-first mode, the Board of Supervisors unanimously designated stock options as employee compensation requiring companies to pay The City 1.5 percent of the difference between the stock’s market value and its cost to the employee.

To a new local generation of hot high-technology companies — such as microblogging site Twitter and online game maker Zynga — that are quickly approaching the level of going public, the stock option tax is a formidable barrier against remaining in San Francisco. After all, a large number of employees exercising their stock options could cost the company tens of millions of dollars for a tax easily avoided by just relocating outside the city line.

At least the intense business scrutiny on city taxes has prodded no less than three supervisors to bring the board competing proposals to do something about the stock option tax.

Supervisor Ross Mirkarimi wants a two-year moratorium on the tax, which seems like a lot less than what any sensible employer at a fast-growing company would consider adequate. Why would such a company sign a lease locking it into San Francisco for five years if they weren’t sure their stock options would still be tax-exempt after two years? Mirkarimi’s approach seems pointless.

In contrast, new Supervisor Mark Farrell, coming from a venture capital background, calls for totally eliminating stock options from the definition of “compensation” for payroll tax purposes. This would be by far the most direct method to accomplish what needs to happen to keep major players from relocating their cash and jobs to Brisbane or the South San Francisco industrial district.

Board President David Chiu wants to form a committee to recommend what should be done about taxing stock options. This might possibly become part of a November 2012 ballot measure on business tax reform Chiu has been promoting. Unfortunately, because throwing problems into a study committee empowers the supervisors to delay any difficult decision-making, Chiu’s plan could be likeliest to prevail.

An only-in-San-Francisco stock option tax counterproductively targets the most productive, fastest-expanding companies — businesses bringing the greatest benefits to The City but having the least need to remain here. City Hall needs to fix this problem without piddling around. The supervisors should pass Farrell’s elimination bill right away. Settling for a stopgap would merely continue holding the door open for successful companies to leave town before going public.

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