Yet Another Bad Policy Idea for California: San Francisco Proposes An ‘IPO’ Tax

Yet Another Bad Policy Idea for California: San Francisco Proposes An ‘IPO’ Tax

Anyone thinking that California can’t become more anti-business or add another punitive tax hasn’t seen the recent news out of San Francisco. Political leaders there are campaigning for an increase in the city’s “IPO tax,” which is both unnecessary and counterproductive.

The proposal, sponsored by Supervisor Gordon Mar, would hike the current 0.38% tax rate to 1.5% on stock-based compensation that some companies pay to employees, which “can become particularly lucrative in an IPO,” says the Wall Street Journal. Mar said the tax increase, nearly a 400% spike, and retroactive to early May when it was introduced to cover a number of major IPOs, including Uber’s, Pinterest’s, PostMates’ and possibly Airbnb’s, will be on the city ballot in November.

Given that it’s been “raining IPOs” in California this year, a lot of money could change hands if San Franciscans increase the tax. Revenues — Mar is counting on $100 million to $200 million over the first two years — would be used “to address concerns about growing wealth disparity,” says the Journal.

An idea that is outrageous and extortionate, Mar says the higher rate should be charged “for the privilege of engaging in business in the city.” How is that any different from him saying “that’s a nice business you have there, be a shame if anything happened to it”?

Not that such a statement is unexpected. When politicians see wealth being created in the private sector, and commerce booming, they always find a way to get their hands on the dollars, though they never earned a cent of the income.

San Francisco’s IPO tax was cut in 2011 from the 1.5% rate Mar is seeking to reinstate to the current 0.38% rate “as part of a change in” the city’s “tax structure intended to keep companies from leaving.” In fact, the lower rate actually attracted companies to the city. The temporary tax reduction was enacted in the first place because Twitter and other job creating tech firms threatened to pick up shop and move across to bay to Oakland or Emeryville – taking jobs, economic investment and tax revenue with them – if San Francisco enacted an IPO tax.

If officials were afraid companies would quit San Francisco in 2011 over the higher rate, why do they think 2019 and beyond would be any different? Were the disincentives of high taxes simply not considered when Mar’s proposal was being drafted? Is nothing ever learned by tax-happy politicians?

If businesses would have relocated after 2011 under the higher rate, as anticipated, it should be no surprise they would leave San Francisco, even the state, when that higher rate is brought back. Even the San Francisco Chronicle editorial board sees the folly in an IPO tax hike, calling it a “a simple-sounding, business-punishing levy that may or may not make even a dent in income inequality.”

“Firms already hampered by the high cost of operations here will have another reason to expand or relocate elsewhere. Tacking on a tax needs more explanation than righteous anger over lopsided incomes.”

The “high cost of operations” include the new taxes levied by Proposition C, an initiative intended to raise as much as $300 million a year for the homeless. It was approved by nearly 61 percent of the voters just last fall.

San Francisco might be spared the negative effects of the tax hike because Mar’s proposal needs a two-thirds approval from voters. In addition to the Chronicle’s opposition, the San Francisco Chamber of Commerce, as well as the Silicon Valley Leadership Group, which represents Apple, Facebook, and Google, have also expressed their objections. Given the political weight those companies and institutions carry, no one would be surprised if the tax hike were rejected.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.