Hey Area: Is the Bay Area losing money to corporate tax incentives?

May 9, 2017

 

San Francisco has the strongest economy of any city in the U.S. And with business booming, a lot of eyes are on local corporations to see if they are giving back to the local community by paying their fair share in taxes.

KALW listener Eli Dart was one of them, and he had a question for Hey Area, our collaborative reporting project between our reporters and our listeners.

 

Dart wanted to know: “How much money do cities in the Bay Area spend on tax breaks for corporations to get them to locate in a particular place or do a particular thing?”

 

It seems like a pretty reasonable thing for a local citizen to want to know. Twitter got a much-publicized tax break after moving to San Francisco’s Mid-Market neighborhood in 2012. And the Raiders recently announced they are moving to Las Vegas, partially because the city of Oakland didn’t want to fund a new football stadium

 

Before we try and find an answer for the whole Bay Area, let’s start in San Francisco.

 

Look at the payroll tax

 

San Francisco Chief Economist Ted Egan says that there are only 2 business taxes in San Francisco, and businesses can only get a break on one of those taxes. The payroll tax.

 

“Payroll is basically a tax on wages and salaries of your employees in San Francisco,” Egan explains.

 

So the more salary a business pays, the more they get taxed. And sometimes San Francisco wants to get businesses to do specific things, so they give them a break from paying some or all of their payroll taxes. For example, in 2004 the city completely stopped charging payroll tax to certain biotech companies. The goal was to get biotech in the city, in order to create more economic diversity here.

 

“There's a lot of biotech research coming out of UCSF,” says Egan, “but before they did this there were zero biotech companies coming out of San Francisco. They were all in South San Francisco.”

 

Five years after the tax break started, the city had around 60 biotech companies. Egan says this was partially because the tax break made San Francisco more affordable for these businesses, but also it was good advertising. Like a big sign in San Francisco that said ‘We like biotech!’ In 2014 companies got to save $2 million dollars in taxes because of the biotech exemption.

 

The Mid-Market tax break

 

But the biggest payroll tax break that the city gives out is for businesses in the Mid-Market neighborhood. That’s the one that Twitter gets for having it’s headquarters on Market street. Spotify and Zendesk also have offices a few blocks down from there. City officials had been trying to attract more businesses to this area for years.

 

“It's pretty clear that if the goal of that tax was to bring businesses to central market -- it worked,” says Egan. “The harder question to answer is: did it just move economic activity from one part of city to another and the city as a whole didn't get anything out of it?”

 

Egan says this is a question we will likely never be able to answer, even though he wrote a whole report for the city on this tax break. That’s because it’s unclear which companies would have left the city without it, taking all their tax money with them. But we do know these mid-market businesses saved around $34 million dollars in 2014 under the tax cut.

 

So let's try to answer our first question: how much money does San Francisco give out in tax breaks to businesses? For the most recent year I got all the numbers for, which is 2014, businesses in San Francisco saved $47,302,998 dollars in payroll taxes. And most of that came from the mid-market tax break.

 

A different way to look at this, though, is not how much money the city lost or gained, but how effective the tax breaks are. They’re a tool. One that the city can use to encourage companies to do specific things. But they are usually not a good way to bring in revenue.

 

“It's easy to design a tax incentive that loses money, and it's very hard to design a tax incentive that makes money,” explains Egan.

 

“So the real reason that jurisdictions do it is to achieve other economic development objectives like jobs, or neighborhood revitalization, or creating employment opportunities for disadvantaged groups. Whether that's good or not — that's for political leaders to decide.”

 

Other people’s money

 

But is San Francisco just taking money from other Bay Area cities? Like if San Francisco didn’t provide that tax break, and Twitter had moved to Mountain View, would Mountain View residents get that extra tax money?

 

“That's a fair point to make,” says Egan, “but San Francisco business taxes are way higher than anyone else's. So if they had moved to Mountain View, they'd be paying a small fraction of the business tax they pay in San Francisco.”

 

San Francisco brings in around $600 million dollars in businesses taxes right now. That’s 15 times more than San Jose, which is a bigger city population wise. Egan says the only other Bay Area city that has a sizable business tax is Oakland. And they don’t have any tax incentives for businesses to move there. That new Uber office that’s headed to Downtown Oakland? No tax breaks. No tax breaks in Berkeley either.

 

“What does Bay Area do to attract companies? The reality is we don't really do much at all,” explains Egan. “It's just not something we've ever really needed in the bay area.”

 

I phone KALW listener Eli Dart back to give him his answer.

 

“Wow.” Dart sounds surprised.

 

“It's sounding to me like this is a reasonable policy, that doesn't cost a huge amount of money on balance. My fear was that there was a whole bunch of money being spent on essentially corporate giveaways,” Dart says.

If you want to try and evaluate a tax break for yourself, let’s take the Mid-Market one as an example. It's clear that it brought new businesses to that part of San Francisco, but it is unclear how much money it actually cost the city. So if you like what it did and are fine with uncertainty around costs, then corporate tax incentives might be a policy that you should support in the future.

 

This story is a part of Hey Area, KALW's collaborative reporting project. Got a question for Hey Area? Ask it below.

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About Hey Area asker Eli Dart

Credit Jeremy Dalmas

Eli Dart is a network architect who works near UC Berkeley. He lives in Castro Valley with his wife and child.