Biotech's bonanza

Is the local business tax exemption for this thriving industry worth the cost?

Allopartis Biotechnologies in Mission Bay is exempt from paying payroll taxes for its six employees

By Adam Lesser

It's difficult to measure the value a biotechnology company receives from locating in San Francisco. Most measures are qualitative: scientists talk about synergy with other biotech companies in the area, the intellectual community that thrives at the University of California-San Francisco, and support offered at the California Institute for Quantitative Biosciences (QB3).

But the quantitative costs are easier to calculate, beginning with rents that often are two to three times higher than in the East Bay or South Bay. Add San Francisco's 1.5 percent payroll tax, and companies can begin to attach a dollar figure to the premium of being in San Francisco.

To incentivize biotech companies to locate in San Francisco, Mayor Gavin Newsom is asking the Board of Supervisors to extend the six-year-old Biotech Payroll Tax Exemption. The exemption allows any new biotech company to get a full 7.5 years without paying local business taxes as long as it files for the exemption by Dec. 31, 2014.

At a time when San Francisco city officials are struggling to close a budget deficit of more than $500 million — for which Newsom hasn't offered any significant revenue proposals to help bridge the gap — some are questioning why the city should continue giving millions of dollars in tax breaks to the thriving biotech industry.

The core question of whether the payroll tax credit has worked in bringing more biotech companies to San Francisco is complex. While Newsom boasted of attracting 54 new biotech companies in the last five years during his Jan. 13 State of the City address, analysis of the credit by Ted Egan, the city's chief economist, indicated that only eight companies had applied for the credit by the end of 2008.

The thriving research environment at UCSF-Mission Bay and the establishment of the state taxpayer-funded California Institute for Regenerative Medicine have played significant roles in creating a favorable environment for young biotech companies. The last five years also have seen broad growth in biotech as scientific discoveries have accelerated. Would biotech companies have come to San Francisco regardless of the payroll tax exemption?

The city's Office of Economic Analysis looked at the question of how effective the payroll tax exclusion actually has been in spurring biotech growth. Because the size of the incentive — an exemption from paying a 1.5 percent tax on its total payroll — is relatively small, Egan felt that there could not be a conclusive link between the exemption and biotech growth. But he did feel there was some benefit, writing in his analysis that "in fact, the primary worth of the incentive may lie in its marketing value and how it signals to the industry that San Francisco is a credible location for biotechnology."

Between 2004 and 2008, the biotech tax credit cost the city $1.2 million. If costs stay on pace with 2008, the existing Biotechnology Tax Exclusion will cost at least an additional $2 million. There are no cost estimates yet on extending the credit to give all biotech companies the full 7.5 years of payroll tax exclusion.

The extension faces opposition. Sup. John Avalos, chair of the Board of Supervisors Budget and Finance Committee, has expressed concern about the effectiveness of tax credits.

"I'm not sure the city is going to be able to show a direct connection between taxes and the growth of the biotech industry. The verdict is still out for me," Avalos told the Guardian. "We've created the whole infrastructure for the industry around Mission Bay. That could have a lot to do with companies coming to San Francisco." The city donated a portion of the land the UCSF-Mission Bay campus was built on.