For years, San Francisco has willingly given up millions of dollars in payroll tax revenue to attract biotechnology and clean tech firms to the city and to encourage businesses of all kinds to move or expand to certain neighborhoods, such as the South of Market area.
The city has long viewed payroll tax breaks as a way to create jobs. But which companies have received those tax breaks and whether those firms have created more jobs as a result is difficult to determine, because tax information is not public under city law.
Now, city leaders are debating the future of these existing tax breaks, as they consider replacing the payroll tax with a different kind of business tax. At the same time, they are considering giving more companies tax breaks.
Today, the Board of Supervisors will vote on a payroll tax break for businesses with less than $500,000 in wages if they add up to $250,000 to their payrolls.
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Supervisor Mark Farrell says his legislation is “creating jobs with the money.”
But a legislative analyst’s report examining the measure said the city won’t know if the tax break actually creates new jobs or whether the jobs “would have otherwise occurred.”
San Francisco is the only city in California with a payroll tax. It represents about 13 percent of the city’s annual revenue and generated about $400 million last year. San Francisco gave businesses about $4.1 million in tax breaks last year and $2.1 million the year before, according to the city's Office of the Treasurer and Tax Collector.
The city could eliminate the payroll tax entirely, under separate initiatives proposed by Mayor Ed Lee and Supervisor John Avalos. Both measures would replace the city's 1.5 percent payroll tax with a tax on companies' gross revenues.
The mayor says his measure will generate as much revenue as the current tax, while encouraging job creation. Under his plan, companies that currently receive payroll tax subsidies would receive a tax break of equal value.
"We were just wishing to protect economic development in these areas,” said Lee spokesman Francis Tsang. “It is just part of the economic development strategy to create these centers of industry and to help our economy, not hurt it.”
Avalos says his proposal would raise $40 million more in revenue than the current payroll tax by increasing the annual registration fee on larger businesses. But his proposed initiative would not extend existing payroll tax subsidies because he believes there’s no proof that they create jobs.
“The mayor’s administration always rolls out the tax breaks as something providing a great jobs benefit in those sectors. I don’t know if that is true or not,” he said. “It’s a chicken-or-egg question: The city has put a lot of investment in Mid-Market. We spent millions of dollars building a whole biotech district (in) South of Market. Did that have the primary effect on jobs growth? Or was it the tax break?”
Jim Lazarus, a senior vice president of the San Francisco Chamber of Commerce, insists the subsidies have been successful.
“The biotech tax break has been hugely successful. We now have 100 companies after only having a handful 10 years ago,” he said. “Representatives from biotech companies make clear that payroll tax exemptions are the direct cause of the ability of their venture capital funders to have those businesses set up.”
Lazarus said he would oppose making public the names of companies benefiting from these programs. “I don’t see what difference it would make,” he said.
But Jed Kolko, chief economist for Trulia, a real estate listings and data firm, said it’s difficult to determine whether business subsidies are succeeding without knowing which companies have benefited from them.
“What company – knowing that if a tax credit continues, they’ll continue to benefit – would say it didn’t do what it was supposed to do?” said Kolko, who studied California tax incentive programs as an associate director of research at the Public Policy Institute of California. “There are lots of reasons why biotech would have grown during this period.”
Massachusetts, Rhode Island, Wisconsin and Oregon have laws requiring disclosure for business subsidies, according to Phil Mattera, research director of Good Jobs First, a Washington, D.C., advocacy group assembling a national database of local business subsidies.
“The public has the right to know when public resources are given to private parties,” Mattera said.