City weighs new corporate tax on stock compensation as tech companies prepare to go public

‘IPO earthquake’ expected to increase housing prices, wealth gap

San Francisco voters may have the chance in November to boost the tax on stock compensation under a proposal announced Wednesday by Supervisor Gordon Mar to target tech companies going public.

Mar’s plan would tax companies for stock compensation at a rate of 1.5 percent — up from the current rate of .38 percent — that he estimates could generate up to $200 million in the next two years.

The proposal comes as San Francisco braces for as many as six tech companies’ to make initial public offerings in 2019 alone, something Mar called an “IPO earthquake.”

Going public will provide the thousands of employees who work at these companies with a significant infusion of wealth that is expected to further exacerbate San Francisco’s already astronomical housing prices and widen the wealth gap, which the tech boom has contributed to since 2010.

“It’s time we turn the page on trickle down policies of the past. It’s time we disrupt inequality,” Mar said.

The District 4 Supervisor announced the proposal at Wednesday’s Board of Supervisors Budget and Finance Committee hearing addressing the impacts the IPOs could have on The City. He plans to formally introduce the measure in the coming weeks.

It would take six votes to place it on the November ballot, and it’s not clear yet if he has those votes. The companies would have to pay the tax when employees exercise their stock options.

Mayor London Breed is waiting to see the details of the measure. “We haven’t seen any details about the proposal yet, but we look forward to learning more,” mayoral spokesperson Jeff Cretan said Wednesday.

The revenue generated from the tax would go into a “Shared Prosperity Fund” to pay for things like affordable housing, small business assistance and programs for low and middle-income workers. Mar said he created the proposal in collaboration with Jobs With Justice San Francisco, San Francisco Rising and the Chinese Progressive Association.

In 2008, the tech industry comprised 4 percent of private employment and 7 percent of total private wages, but come 2017, these figures rose to 13 percent and 24 percent, respectively, according to a report from the City Controller’s chief economist Ted Egan.

Egan said the industry saw a “tripling of its importance to the city’s economy in a 10 year period.”

“Over 4,900 active technology start-ups were founded in the city between 2008 and 2018, and over $134 billion in venture capital was invested in San Francisco-area companies during that period,” the report said.

Mar said the shrinking of the middle class and the conentration of wealth “happened, at least in part, because of decisions made in this chamber and in this building to grow the tech sector.”

“We rolled out the red carpet for these companies to startup and grow here. And when they threatened to leave we paid their ransom. We cut their taxes, built their offices and luxury condos,” he said.

In 2012, The City started the process of shifting its tax structure from a payroll tax to the gross receipts tax, which benefited the tech sector.

A year before, the Twitter tax break was approved, a temporary exemption from the city’s then 1.5 percent tax on payroll. City officials estimated Wednesday that it saved the company about $40 million in taxes on stock compensation in the two years after it went public in 2013.

Egan said that the switch to a gross receipts tax structure, which was approved by voters, benefited the tech industry more than projected at the time.

In 2017, the information sector would have paid $190 million under the former payroll tax, but instead paid $165 million, a 14 percent decrease. “This is a little bit more of reduction than we had projected in 2012,” Egan said.

This year, Lyft and Pinterest have gone public. Uber is expected to go public next.

To date, Twitter is the largest IPO that has occurred in San Francisco; it was worth about $20 billion at the time it went public. The biggest IPO that has ever occurred is Facebook, which was worth $100 billion when it went public, according to Egan.

“Uber could very well be bigger than Facebook. Uber could by itself be four times larger than the largest IPO we’ve ever seen in San Francisco,” Egan said.

Other tech companies that city officials say may go public this year are Airbnb, Postmates and Slack.

Egan estimated that Lyft, Pinterest and Uber would could lead to a 0.5 percent to 1.9 percent increase in home sales prices, which are currently at a median of $1.3 million. The median monthly rent of $4,400 could increase between $24 and $81.

A budget analyst report had different calculations and also detailed the inequalities that emerged during the tech boom.

The report estimated there would be a 1.8 percent impact per IPO on the median sales price on homes, using data from a recent study on IPOs in California. The study, “Cash to Spend: IPO Wealth and House Prices,” looked at the impact on local housing costs on IPOs in California between 1993 through 2017.

That means that if all six companies go public, today’s median income sales price of $1.3 million would increase by 11.3 percent, or $147,346, for a total of $1,451,546. There are at least 7,990 local employees working at the six pontential IPO companies, according to the report.

The report also shows how San Francisco’s real estate costs soared along with income inequality as The City adopted policies to encourage the growth of the tech sector.

Between 2010 and 2017, The City’s population grew from 805,235 to 884,263 and added more than 60,000 jobs. During this time only 13,434 new housing units were built and the median housing prices soared from $697,000 to $1.1 million.

“Housing units, of course, did not keep up with the growth in population as we all know,” said Fred Brousseau, director of policy analysis in the Budget Analyst’s Office. “That did not help in terms of real estate prices. There was already great pressure, high prices, when we started in 2010. The influx of population and jobs put more pressure on the housing stock that was available.”

Higher wage earners disproportionately increased in San Francisco during the tech boom, contributing to the wealth gap.

“The largest increase in households were those with incomes of $200,000 or more, which nearly doubled from 12 percent of all households in 2010 to 21 percent in 2017,” the report said.

“While not the sole cause of income inequality in San Francisco, the occurrence of up to six IPOs in 2019 will add a one-time injection of wealth to many well-paid workers, investors, and founders further increasing the wealth gap and likely causing some increase in housing prices,” the report concluded.

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