Why payroll tax breaks are stupid


Jeez, the folks at BeyondChron are so enamored of mid-Market payroll tax breaks you'd think they were getting one themselves. (But since nonprofits don't pay the city's business tax, maybe Randy Shaw doesn't understand how it works.) Paul Hogarth, using a term typically employed by the Chamber of Commerce, call the tax a "job killer:"

Rather than taxing company profits or their net worth, the payroll tax is calculated on how many people they employ – which by definition makes it a “job-killer” for business that are hoping to expand.

And David Chiu told us he thinks we need to "reform the business tax. The payroll tax is a job killer."

Now: I agree, we need to reform the business tax. We strongly supported Chiu's proposal to replace the payroll tax with a gross receipts tax and a commercial rent tax (even though the Guardian is a commercial landlord and would have to pay that tax). It's much more fair.

But this talk of the payroll tax being a "job killer" -- and Twitter's threat to leave town unless the company gets a tax break -- boggles my mind. The payroll tax is a tiny, miniscule part of a San Francisco company's expenses. I help run a small business in San Francisco. I have to make hiring decisions based on (tight) budgets, and I've had to do it for more than 20 years. And I can tell you, the payroll tax was never even remotely an issue. It's not a "job killer;" compared to all the other factors involved in hiring in the city, it's nothing, peanuts, birdseed.

Here's how I explained it last time we had this discussion:

Say you're a biotech company that wants to hire a new entry-level worker at a modest $35,000 a year. Can you afford it? Let's cost it out.

There's the salary, of course. Then there's the 7.5 percent you're paying in federal Social Security tax. That's $2,626 more. And since you're in San Francisco, you're paying for health insurance; that's probably between $2,000 and $4,000 a year, depending on the plan, but let's peg it at the city's minimum mandate, which is $1.09 an hour, or $2,267.

So now your $35,000 worker costs $39,893. Then there's unemployment and disability insurance and workers' compensation. The person's going to need a desk and a chair, or a lab bench and a stool (and they have to be ergonomically correct), and probably a computer, a phone line, and software. And you're going to have to spend some money on training. You're going to offer a couple weeks of paid vacation, right? And you have to give sick days. So you have to account for the money you're spending to cover your new worker when he or she isn't working. If it all pencils out at less than $42,000, you're doing well.

Oh, wait, I forgot — there's the damn city payroll tax. That job-killing factor that could make the difference between hiring and not hiring. Better account for that; it could be a deal breaker.

Are you holding your breath? Ready for the ax to fall? Here you go: the payroll tax on your new hire is a whopping $525 a year. About $10 a week. You probably spent more on the help wanted ads.

Twitter wants a cap on the payroll tax for new employees, and that's supposed to be the make-or-break factor that determines whether the company will stay here. Honestly? If that's really true, then the folks at Twitter need some help in the accounting department, fast.

Again, my previous analysis:

Payroll tax data is confidential, but it's not hard to make rough estimates. Twitter has abut 350 employees now, and if they make an average of, say, $70,000 a year (reasonable in a high-tech firm), then the company payroll is about $24.5 million a year, and the city's 1.5 percent tax comes to $294,000.

Even if Twitter doubles its workforce, the amount it would save with the city's proposed tax break is only about $300,000 a year (the cost of two or three high-end employees out of the 350 the company wants to hire). If Twitter moves into the 200,000-square-foot space it's eyeing in Brisbane (sharing an office, reports say, with Walmart — how cutting edge!) and pays $25 a square foot in rent (probably low for nice office space), rent alone will be $8 million a year. Then there's the cost of all those workers driving (or taking a private bus) to a location badly served by transit. The payroll tax liability in San Francisco is tiny in comparison.

Twitter would probably be paying more for the moving vans to haul its gear to Brisbane than the payroll tax it's going to save. If it follows the likes of Genentech and Google and pays for fancy buses to transport its employees, the cost will make the payroll tax seem cheap. And if Chiu's reforms ever become law, and there's a commercial rent tax, and Twitter's landlord passes it on to the tenants (likely), then guess what? Twitter's taxes are going to be way higher anyway.

That's why I think this is bullshit. It's got nothing to do with Jane Kim or Randy Shaw or any of his political garbage. It's simple economics. Twitter is jacking up the city for a tax break that will cost San Francisco money -- but won't be even a teensy weensy factor in job creation.

The reason this matters: Corporations constantly demand tax breaks from cities. And every time a city gives in (and let's remember: the mid-Market tax break plan didn't start with a need to help small businesses in the Uptown Tenderloin; it came from Twitter's threats to move to Brisbane) then it opens the door for more blackmail. And if we're going to make deals with these folks, let's at least be be honest about it.

Again: If Twitter really, honestly thinks this tax break will make it more financially feasible to stay in the city -- with all the other factors involved -- then the bean counters there need to take a refresher course in Bean Counting 101. Tax breaks of this sort don't create jobs; never have, never will. That's the real lie we're dealing with.