California has long been the preeminent home for dreamers, seducing the world’s most talented and successful movie stars, musicians, writers, techies, developers and deal makers. California is the place the talented and driven go to turn dreams into reality. Their personal success has, in turn, fueled government’s economic engines for decades, pushing California from the country’s dusty western outpost into the eighth largest economy in the world. But some politicians are seeking quick fixes for the decades of their out of control spending habits by extorting some of the world’s most innovative companies. San Francisco Mayor Ed Lee and the Board of Supervisors reached a 20 year low this past week when proposed a new tax scheme to raise revenue from innovative entrepreneurs. What an anti-American idea; this isn’t Russia. Mayor Lee should end his thoughtless campaign to drive jobs from San Francisco and start prioritizing spending from the revenue he has. San Francisco doesn’t have a revenue problem, they have a leadership problem.
The city’s payroll tax – a rarity for Silicon Valley and other major tech industry hubs – punishes pre-IPO companies with excessive taxes for keeping their offices in San Francisco. Companies like Twitter that haven’t yet gone public are being punished if they don’t move to the city’s new business development zone dubbed “hooker central” by some. If they move to the low end, they get a high end tax break. Unlike San Diego who redeveloped a 16 block decaying section of the city to attract new businesses, San Francisco wants privates companies to move to the blighted area before they do the work. Looking at topographical maps of crime in San Francisco leads one to question why the public needs a Mayor and Board at all if they just tell private companies to do the hard work of redevelopment.
Twitter and other pre-IPO tech companies have three unattractive options: 1) pay exorbitant taxes and stay in their offices; 2) force their employees and clients to travel to undesirable and unsafe new offices; or 3) flee the city limits. To be fair to Lee, the payroll tax has been on the books since 2004 but it hasn’t been enforced until now. It’s a travesty that an unelected official like Lee would be allowed to destroy growing businesses in San Francisco. Twitter, perhaps suffering a bit of Stockholm Syndrome, has taken the high ground in the media, staying quiet, avoiding critical comments, and agreeing to stay if the incentive laid out by Lee is approved.
Unsurprisingly, the response by businesses to schemes like these is to simply flee California. Hitched to their U-Hauls are much-needed tax revenue, jobs, prestige and a myriad of other benefits for the state. The list of companies abandoning the state is staggering: Computer Sciences Corp., DaVita, Hilton, Nissan North America, Northrup Grumman, the list goes on. And for those innovative tech companies staying put, expansion plans are being made outside of California. Apple built a $1 billion facility in North Carolina – a lovely place but not the hotbed of innovation like California. eBay’s new operations center is in Utah. Even the Automobile Club of Southern California uses its AAA Texas employees to do the work for the state.
Developing these creative tax traps – which would make Inception director Christopher Nolan jealous – requires enabling and support from the highest levels of the state’s political system. Senators Barbara Boxer and Dianne Feinstein provide cover for Lee, his Supervisor friends and Lee’s counterpart in Los Angeles, Mayor Antonio Villaraigosa. Politicians are shamelessly taking entrepreneurs hostage because they can’t come up with innovative solutions on their own. They bleed every penny they can out of local businesses, and when a company skips out-of-state for reasonable tax laws, they find a new one to bully. Lee’s characterization of this scheme as an “incentive” is laughable – it only incents politicians to chase naive ideas.