Is the local business tax exemption for this thriving industry worth the cost?
Allopartis Biotechnologies is a small biotech startup in QB3 at UCSF-Mission Bay that has received venture capital funding. It saved $3,670 in 2009 by qualifying for the payroll exclusion. Allopartis has six employees and focuses on developing technologies to convert biomass into sustainable fuels.
"You pay a premium to be in the city, and it's worth it," said Robert Blazej, cofounder of Allopartis. "We'd like to stay close to this nexus of innovation and collaborators. But it's going to be challenging with the cost of square footage."
Interviews with other growing San Francisco businesses showed that their biggest concern was the cost and availability of commercial real estate. Zynga, a social gaming company in Potrero Hill, plans to add 800 jobs over the next two years. Newsom has asked for an additional waiver on payroll taxes for all new hires over the next two years, regardless of industry.
"We considered moving out of San Francisco for a couple reasons. One is the availability of commercial real estate. The other is the payroll tax," said Chief Financial Officer Mark Vranesh. "The large blocks of space we would be looking for are hard to find."
But as the city tries to plug gaps in dwindling city services, concerns are mounting about how much the city can give away to companies under the premise that tax credits create new jobs. In the debate about the biotech tax credit, objections have been raised about the fundamental fairness of giving a tax break to one industry while others still pay their share. Similar next generation industries with large up-front research and development costs such as solar energy or fiberoptic Internet do not receive payroll tax waivers.
Economists such as the Tax Foundation's Patrick Fleenor are quick to point out that there are no political advantages to taxing everyone equally. "The problem is a political one. If you tax everyone the same, there aren't politicians creating little fiefdoms. There aren't ribbon-cutting ceremonies," he said.
Avalos has equated judging the effectiveness of tax credits at creating jobs to looking into a crystal ball. But the price tag of each tax credit is borne in the present as the city contemplates laying off hundreds of city workers.
Adding to the political infighting have been public complaints by Sup. Michela Alioto-Pier that Newsom is trying to take credit for the biotech payroll exclusion, which she originally proposed and helped legislate in 2004. She requested an extension for the biotech tax credit in November. Her office has defended the bill. "We're creating a hub so that other biotech companies can come to San Francisco," said Bill Barnes, Alioto-Pier's legislative aide. "When she was courting biotech, she was hearing that the payroll tax was an impediment."
But other cities charge local business taxes comparable to San Francisco's payroll tax. And if there was ever an industry that has been heaped with support from the public sector, it is biotech.
Proposition 71 passed with 59 percent voter support in 2004 and established the CIRM, which provides grants and loans for stem cell research. Stem cell research is an area within biotech that has seen significant political support, particularly since the time of the Bush administration, when federal funding for embryonic stem cell research was heavily restricted.
But appearing to be doing something about the economy remains politically important, even if the actual benefits are somewhat dubious.
"It's a big political game that the mayor is playing. He wants to paint progressives as anti-jobs, which is ridiculous, and paint himself as the mayor for jobs," Avalos told us. "We would be cannibalizing government services for the private sector."