Doing Business in San Francisco can be Bad for a Company’s Bottom Line

Doing business in San Francisco can be bad for a company’s bottom line, a new report suggests.

Consider this statistic: A business in San Francisco with 108 employees and a payroll of $5.4 million would pay $81,000 a year in annual taxes while the same business in San Jose would only pay $1,800.

That’s just one of the findings in a report by Budget Analyst Harvey Rose released last week. The report, which was requested by Supervisor Mark Farrell, surveyed 20 jurisdictions — 14 cities including San Francisco and six states — to see how those places taxed businesses and what incentives they offered.

According to the report, San Francisco was the only jurisdiction that taxed companies based on its payroll, which includes stock options. That tax is “significantly greater” than other flat taxes levied in 13 of the 20 areas studied by the report. San Jose, for instance, charges $18 per employee for businesses with more than eight employees while San Francisco taxes 1.5 percent of the total payroll.

Meanwhile, 14 of the places surveyed offer at least one type of financial incentive such as tax credits to businesses. San Francisco was not one of them, although it has offered tax breaks to attract businesses to certain areas such as Mission Bay.

While the report didn’t draw any conclusions, Farrell said it showed that San Francisco needs to change the way it attracting and retaining companies in The City.

“Not only are other regions not taxing people, but they’re offering incentives as well,” said Farrell, a venture capitalist elected to the board in November. “They’re investing in the future as cities and regions. I think it’s a good starting point to look at these other regions and see what’s working.”

The report comes out at a time when San Francisco leaders are scrambling to keep tech startups such as Twitter, Zynga and Yelp.

The Board of Supervisors already passed a six-year payroll tax exemption for businesses that move into a blighted area of Market Street including Twitter. The second step, according to Farrell, Mayor Ed Lee and Board of Supervisors President David Chiu, is to eliminate taxes on stock options.

After that, Chiu said, The City should be looking at changing the payroll tax in general. One option on the table is changing the payroll tax to a gross receipts tax, taxing businesses on their profits, not on the number of people employed.

“I ran a tech company for over eight years and I ran for office on the fundamental belief that San Francisco is not an easy environment for companies that are innovative,” Chiu said.

Brian Brennan with the Silicon Valley Leadership Group says that companies that have yet to go public on the stock market are wary of hiring new employees in San Francisco because of the tax restrictions.

“When governments everywhere are all about job production, a tax on jobs seems to be counterproductive,” Brennan said.

As tech booms, many worry about a bust

Efforts to keep technology businesses in The City and grow the Silicon Valley north may be the signal that tech startups are booming in The City.

That sounds familiar to a lot of people who watched the dot-com bust in San Francisco a decade ago. Jennifer Thompson produced the film “American Dream 2.0” about three individuals struggling during the crash.

“One of the things that stands out most in my mind is driving down the streets on Sundays and the sidewalks are littered with homes-for-sale signs,” recalled Thompson, who now runs San Francisco-based production company Green21. “It felt very vacant.”

Deals are once again being made and that has helped the Bay Area recover from the recession, but it’s important to remember that it cuts both ways, according to city Economist Ted Egan. Technology businesses are also the fastest to fall.

“The industry is characterized by bigger swings on the whole,” Egan said. “What’s happened as we became more tech heavy is we are more part of that boom or bust cycle.”

There’s a lot of discussion about another dot-com bust, according to Brian Brennan of the Silicon Valley Leadership Institute.

“What I think is, there will always be the possibility,” Brennan said. “The very fact that people are talking about it and raising concerns means that it may not be as big a problem.”

“Sometimes it does feel like the dot-com days,” Thompson said. “People say that all the time and there seems to be an awareness. But it’s exciting.”

Top of the tax heap

San Francisco has the highest business taxes out of 20 areas in a new report. Here’s a sample:

San Francisco: 1.5 percent on payrolls of more than $250,000 and an annual fee ranging from $25 to $500
Mountain View: Annual fee ranging from $30-$100
Palo Alto: One-time fee of $381
San Diego: Annual fee of $125, plus $5 per employee
San Jose: Annual fee of $150 plus $18 per employee over eight employees
Boston: $50 to $75 paid every four years
New York: 8.85 percent of business’ net income, plus other methods
Seattle: Annual fee of $90 plus 0.15 to 0.415 percent gross receipts tax

Source: San Francisco Legislative and Budget Analyst