Focus on tax reform and scrap the sleazy giveaway

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OEWD staffers Amy Cohen and Jennifer Matz and private power broker Randy Shaw created a big mess to deal with a more narrow need
Luke Thomas

A few weeks ago, when the Guardian was the only media outlet in San Francisco that seemed to care about the huge Twitter/Mid-Market/Tenderloin tax exclusion zone – which everyone took as a done deal because it was sponsored by Sups. David Chiu and Jane Kim and backed by fiscal conservatives – I had a very illuminating interview with City Economist Ted Egan.

We at the Guardian were instinctively opposed to huge tax breaks for a wealthy corporation and big landlords and our position only became stronger as I reviewed thousands of pages of internal city emails and other public documents and got a sense of the sleazy and haphazard way this was created, and with the unsupported claims being used to sell it.

But then, when I asked Egan what convinced him that Twitter would leave without a tax break, he said the tax on stock options was what convinced him. If media reports were right and Twitter goes public for $12 billion and employees got about a quarter of that, that would translate into about a $40 million one-time tax bill. And that, Egan said, would probably convince most companies to flee.

It made sense to me and the other editors here at the Guardian, so our position evolved and our coverage focused on the rest of the tax giveaway, which Egan told us and the Board of Supervisors Budget & Finance Subcommittee – in two separate hearings – really didn't make much economic sense. SEIU Local 1021 and other progressive opponents of the legislation also softened their opposition and acknowledged that some kind of change to the stock option taxation was probably needed.

Today, as Sups. Chiu, Ross Mirkarimi, and Mark Farrell all introduced varying forms of legislative fixes to the stock option issue -- and the media coverage of the issue begins to pick up steam – what's somehow being lost in the renewed debate is how ridiculously corrupt and wasteful the city's initial approach to the Twitter problem was.

“One is a sleazy land grab and the other is honestly trying to deal with tax policy,” says Gabriel Haaland of SEIU 1021, which opposes the Tenderloin/Mid-Market deal but is open to legislation tweaking the payroll tax's stock options provisions.

Yet, unbelievably, many city officials are talking about approving the massive tax giveaway zone on April 5 and then continuing to give even more tax breaks to Zynga, Yelp, and any other high-tech companies that threaten to leave. Rather than stepping back to reevaluate the whole thing (as Farrell, to his credit, seems to be advocating in his comments to the press), most the officials involved in this seem to be bent on simply giving in to what corporations say they want and asking for almost nothing in return.

As I report in this week's Guardian, continuing my earlier investigation, there are serious unanswered questions and hints of corruption in the way many Tenderloin and Mid-Market properties were offered tax breaks, largely at the direction of private power broker Randy Shaw, yet proponents of the measure have plowed forward with the deal anyway, denying reasonable requests for a public review of what the city is getting in the deal, for reasons nobody can explain.

During a high-stakes election year, when many of these deal makers will be seeking campaign contributions from the very interests that would benefit most of this reckless and ill-considered giveaway of public funds, it would behoove us all to take a deep breath, get the facts, get off our knees, regain a sense of civic pride, and have our toughest negotiators get the best deal we can with these companies.

And those negotiators probably aren't from the Office of Economic and Workforce Development, which cut a bad deal with corporate America on the America's Cup (another story on which the Guardian was a loud and early whistle-blower) and a bad deal on Twitter, largely because this agency exists almost entirely to serve the business community and not city residents. Personally, I'd love to see Egan and Budget Analyst Harvey Rose as the city's negotiating team, two straight shooters who don't have a political pony in the race.

There is a reasonable solution to this problem here somewhere, and it isn't simply about slashing the taxes for every big corporation that wants it, or with simply waiving payroll taxes on stock options, a provision the board created in 2004 to address the problem of companies using inflated stock options to get around their payroll taxes. Mirkarimi's legislation includes a floor of at least $100,000 in salary per employees that companies would still be taxed on when they go public, which seems like a good idea. Farrell has suggested finding a way to value stock options as compensation at the time employees buy them, which also sounds reasonable to us – even though we're a progressive publication and he's arguably the board's most conservative member.

You see, reasonable solutions are possible. But that has to start with abandoning the ill-conceived, badly executed Mid-Market/Tenderloin tax exclusion zone – which Egan has said won't achieve its desired goals anyway – and dealing solely with the issue of business taxes and retention.

Then, on a separate track and with a more transparent process, the city can also deal with revitalizing Mid-Market and the Tenderloin using smart, creative, multi-pronged strategies – some of which may still involve incentives to Twitter and other desirable companies – that don't rely on voodoo economics and wishful fantasies that seem to mask darker ulterior motives.

Comments

between yourself/Tim and Randy Shaw has gotten really old. It's lame that your personal dislike of one another is continually being aired on the pages of The Guardian.

Posted by Lucretia Snapples on Mar. 29, 2011 @ 4:48 pm

They've been fighting a "war on P,G & E" for decades. These old warhorses will never change. Everything is personal for them.

Posted by TheDoc on Mar. 29, 2011 @ 5:31 pm

Which split the church into eastern and western branches. Obscure arguments which never end and which only the participants themselves understand (although sometimes I wonder if any of them really do).

Posted by Lucretia Snapples on Mar. 29, 2011 @ 6:48 pm

Earth to Lucretia:

If it's so lame why do you continue to read and comment on every single article? Are you a masochist or just an imbecile?

If you want the pro-corporate line I have an excellent recommendation for you: the San Francisco Chronicle. I think you'll find it quite to your liking.

Meanwhile some of us still appreciate an independent viewpoint.

Please, do yourself an enormous favor. Stick to the Chronicle for your news. You'll live longer and happier.

Posted by guest on Mar. 30, 2011 @ 7:53 am

It's a public forum, that's why.

Posted by Patrick Brown on Mar. 30, 2011 @ 8:09 am
Posted by Guest on Mar. 30, 2011 @ 11:35 am
Posted by Lucretia Snapples on Mar. 30, 2011 @ 7:38 pm

Jennifer Matz was former legislative aid to Michaela Alioto-Pier.

Ha ha. Tells you exactly what's going on.

Posted by Guest on Mar. 29, 2011 @ 5:14 pm

Corrupt moderates like Randy Shaw should stop getting no-bid contracts.

It sucks that he's an eviction-happy landlord but it's worse that taxpayers have to subsidize his Tenderloin poverty-racket.

Posted by Librul on Mar. 29, 2011 @ 9:30 pm

At least this article gives some discussion to other proposals (Farrell's & Mirkarimi's) and notes that they may be reasonable. Though I think both of those supervisors' proposals may not be good solutions. They just seem like band-aids or "time-outs" on a big problem that needs a more drastic fix. And after all the amendments, continuances, etc. on either proposal, they will end up being band-aids on band-aids on a big problem. The payroll tax seems antiquated, unfavorable to job creation, and should probably be jettisoned across the board.

I wish the author and other authors of this publication would find other source material. Reading articles where Haaland is always quoted--here, the only quote--makes the positions the articles advocate lose credibility. Though it's nice to read what legislation SEIU 1021 is "open to." Heaven forbid any legislation is proposed they are not open to.

Posted by The Commish on Mar. 29, 2011 @ 8:28 pm

Still, I pay sales taxes every time I purchase anything, and I pay income taxes. Stock options needed to be taxed somewhere in the transaction, and businesses need to pay their fair share to the community. Only fair.

Posted by Sue on Mar. 29, 2011 @ 9:55 pm

Stock options are already taxed at the federal and state level. When someone exercises options, they are taxed--typically at the highest marginal rate.

Posted by The Commish on Mar. 29, 2011 @ 10:28 pm

I've lost count of who is responsible for the most incorrect statements and mis-truths on The Guardian chatborad: Marc, The Doc, or The Commish. Such strong opinions - ABOUT EVERYTHING - and for the few subjects I happen know a little bit, they are almost always so far wrong about one fact or assumption or another. Terribly misleading for anyone trying to learn something about a subject or policy. Passing along bad information is always embassassing, but when it's done with their dominant tone of "Listen to me, I know everything," it's shameful and frightening.

Do the three of you get paid by downtown or the Chamber of Commerce to post your mis-truths on this chatboard? I hope so, because when people have to waste a lot of energy trying to correct your mis-statements and half-truths, it wastes a lot of precious time that could be used productively. Please let your employers know you're doing a fantastic job furthering the reactive, mal-informed public, many of whom ientify as "progressive." The economic status quo will have a long and healthy life with the three of you helping maintain it with your mis-truths and mis-statements for generations to come.

Now as to your statement, most stock received from stock options is subject to capital gains tax - the LOWEST tax - not the highest tax brackets that apply to ordinary income. Stock options and their exercise and subsequent stock sale can be quite complicated since it depends on if you're talking about "non-quals," or ISO's, or other option plans. Lawyers are smart. The plans are often drafted to minimize taxes for everyone, employees and companies alike.

As far as Caliofrnia taxing them, that is also a terribly misleading statement since this is hardly always the case. Over the last 10 years there has been a nice cottage industry catering to Californians (and othes) who set up residency in Nevada or Florida for a couple of years to avoid California tax on large stock sales. It can save millions and millions of dollars in taxes for the big boys and girls that strike it rich. And if people retire and move to another state, not every state taxes stock earned while employed.

But I suspect your point wasn't to make a statement that was helpful to the discussion, but to get people to waste their time responding to your mis-informed and incorrect factual statements. If no one does - people much smarter than I - then your mis-statements and mis-truths hang on this chatboard for a few days and some unsuspecting reader may actually believe your statements. Brilliant. F'n brilliant.

So Commish. Do you and Marc and The Doc get together at the end of each week to see which of you caused the most people to waste the most time responding to your posts? I think Arthur and Marc are 1-2 in this category, but you and The Doc have been closing rapidly as the current discussions increasing center around fiscal and economic issues.

Posted by Robert on Mar. 30, 2011 @ 8:56 am

How many times will you slather these falsehoods about this chat board?

Lawyers are smart? Where's your data for this?

-marc

Posted by marcos on Mar. 30, 2011 @ 9:49 am

Another suberb example of your main debating tool - attack a person, or profession or some find some other broad characterization where your simple mind needs to put all of the "bad people." Debate won. Another victory. Take a bow and give the audience another smirk. Ah, if only life were so black and white.

I do find it interesting that most people I know who only got a hammer from god as their main fighting weapon finally learned that using it made them look much worse than the person or group or organization they were bludgeoning at the time. I guess not everyone is the same. Fancy that.

Posted by Robert on Mar. 30, 2011 @ 11:52 am

Ain't no god, and you should be glad, because were there a god, s/he would be imperfect as s/he gave you a near corner on the market of WRONG.

-marc

Posted by marcos on Mar. 30, 2011 @ 12:25 pm

If you're going to call someone out, at least have your facts right. You don't.

Almost all stock options are NSOs (Non Qualified Options). When the employee exercises the options, they are subject to ordinary income tax rates as compensation income. (So, if you're granted an option with a strike price of $5, and you exercise when the stock is worth $100, you pay ordinary income tax rates on that $95.)

If the employee decides to hold onto the shares after exercise (rare), he would then also pay capital gains if the shares increase in value above that $100.

http://www.fairmark.com/execcomp/nqoexer.htm

I have no idea about the Nevada/Florida "cottage industry" you think exists. Given how reliant Sacramento is on Silicon Valley money, your premise sounds dubious since you apparently think all those people have moved to Nevada or Florida.

Posted by The Commish on Mar. 30, 2011 @ 9:50 am

Commish. You're either part of the uber-elites who qualify for NSO's or you need to get off these chat boards and get out more.

In the over 10 years I've worked as a marketing manager in Silicon Valley for a few different companies, not one - NOT ONE -of my co-workers, former classmates, professional acquaintances or friends has ever - EVER - received a NSO stock option. Instead, we've all received thousands and tens of thousands of ISO's - "Incentive Stock Options" - which is what us "regular workers" get.

The only people I've ever heard about who get NSO's are the handful of top people - the folks who make millions of dollars per year - and NSO's are just another part of their extravagant compensation package.

And again, you're wrong about the "subject to ordinary income tax" part. You need a new lawyer. Ask them about an 83(b) election that allows you to take a small ordinary income hit now in exchange for capital gains - OR NO TAX EVER - in the future.

And you might want to consider suing your attorney for malpractice if they didn't advise you about the 83(b) election. That's a bummer paying all that extra tax. But let me assure you that you're in a super, super select group if you got some NSO's. Those are like gold since companies don't get favorable tax deductions fom granting them and they dilute EPS, so only the elites of the elites at a company hardly ever qualify for them.

But seriously, you and your buddies Marc and The Doc need to get out more and talk to regular people. Maybe even try to listen to some of them - especiallly those who are different from you - and try to see the world from some other perspectives. Staying cooped up at home all day and spending your time on the always unreliable interenet can really distort one's thinking.

I was thrilled to find out you didn't know about how easy it is to avoid state taxes by changing residency to another state for a couple of years before selling the stock. It works best if the tax savings is more than modest - say $1 million or more. But it's good to know that not every trick is widely known so that more people can continue to take advantage of simple tax planning since the states continue to use archaic tax systems like "net income tax" and sales taxes to fund their revenue needs.

Posted by Robert on Mar. 30, 2011 @ 10:56 am

Marketing manager, what an asshole, of course, it should have been apparent.

-marc

Posted by marcos on Mar. 30, 2011 @ 11:00 am

ISOs go to few members of a company--typically upper management. The vast majority of employees get NSOs. Your belief that "regular workers" only get ISOs is the opposite of what's true.

"5. There are two common types of plans:

Employee stock options come in two basic flavors: nonqualified stock options and qualified, or "incentive," stock options (ISOs). ISOs qualify for special tax treatment. For example, gains may be taxed at capital gains rates instead of higher, ordinary income rates. Incentive options go primarily to upper management, and employees usually get the nonqualified variety."

"ISOs give employers no tax advantages and so generally are reserved as perks for the top brass, who tend to benefit more than workers in lower income tax brackets from the capital gains tax treatment of ISOs."

http://money.cnn.com/magazines/moneymag/money101/lesson10/
http://money.cnn.com/magazines/moneymag/money101/lesson10/index4.htm

While you're right that ISOs have different--usually more favorable--tax treatment, the pool of ISOs is usually small and only distributed to a few people.

Posted by The Commish on Mar. 30, 2011 @ 12:24 pm

Since most corporations pay minimal federal income tax, and since they get to write off local taxes as the cost of doing business, then the hit on stock options, $40m out of like $4b is de minimus.

What we've got here is the ultimate in corporate whining, firms that expect to avail themselves of San Francisco's built infrastructure and human resources but don't want to pay for the costs to provide those benefits.

-marc

Posted by marcos on Mar. 30, 2011 @ 8:10 am

Marc, where do you get the $4b from? That is what Robert is talking about.

Posted by Guest on Mar. 30, 2011 @ 11:07 am

$4b is a conservative estimate of the valuation of Twitter, most will stay with the company as capital, right, an IPO is an exchange of paper between a firm and investors, with the firm getting the green paper, and some will not be sold on the market with the IPO but will be sold by stock option holders.

$40m out of that is chump change, almost rounding error.

-marc

Posted by marcos on Mar. 30, 2011 @ 11:21 am

The market value of Twitter may be $4b but the cash they raise in an IPO will be in the low hundreds of millions, if that. $40 million out of $100 million for a local options tax is an issue, to say the least.

Posted by Guest on Mar. 30, 2011 @ 11:37 am

Upon "going public" the company may be worth $4 billion (I've read $6-8 billion in the Wall Street Journal), but that doesn't mean that the employees will have received $4 (or $8 billion) of compensation subject to the payroll tax. Not even close.

First, most of the stock will not be sold as part of the IPO - maybe only 15%-25% of total authorized stock will be sold. (This helps keep the stock price higher and prevents dilution of EPS.)

Second, most of the stock will be cashed out by the initial financing companies, landlords, attorneys, contractors and consultants, none of which is "compensation" income since they are not "employees" of Twitter. So no 1.5% payroll tax on all of these stock payoffs.

And for most of the employees that did get stock options, I would suspect much of their stock is "restricted stock." And although I'm sure no expert - not even well-informed - about the city's payroll tax and how it relates to different flavors of options, I can't believe the city would try to tax unvested or restricted stock as "compensation." They would lose that case very easily since there has been no compensation without an event giving the employee an unfettered right to the stock and the ability to sell it on the open market. Most option plans are designed to put 'golden handcuffs' on employees to keep them around at least until the majority of their options vest. If Herrera can win that case, then maybe he does deserve to be mayor.

My problem with this board is I don't see anyone like Gonzalez who seemed like he wasn't afraid to have knowledgable people from very diverse backgrounds and political perspectives around him to ask good questions and maintain some healthy skepticism about various policies. He seemed to have enough confidence in his own abilities that he could hear different and contrary points of view without getting defensive. (Hello Chris Daly.) As a result of a larger gene pool of ideas, the city made some important progress in the mid 2000's, although to be fair it was a very talented group of supervisors anchored with Peskin, Ammiano and Daly.

It's all been squandered and we're back to mid-1995. Twitter wants to bring 6,000 new jobs to SF and not once did I hear a Supervisor ask their CEO, "But where are your employees going to live? There's close to zero vacancy in SF, Marin and San Mateo counties. Will your employees be evicting tentants from SF rent-controlled apartments so that the building can be converted to TIC's and condos?" (It worked for Dufty and Mirkirimi, why shouldn't it work for Twitter and Zynga and Facebook newly minted millionaire employees too?) Or, "Won't the rents for exsiting tenants be even higher if you bring 6,000 new employeess here when we have close to zero vacancy already?" Or, "Won't the higher rents mean that our current residents will have less money for their children's education, food, medical and transportation expenses? Who's going to compensate them from their economic losses?"

Watch what politicians say, and ignore their often excellent rhetoric. If they are negotiating with companies to bring a lot more highly paid technology employees to the city, they are telling you - passive-aggressively of course - that if you aren't going to be making $150,000 in the next year or two, there is no place for you in SF other than a long line with tens of thousands ahead of you waiting for an opening in an "affordable housing" complex. In the meantime, you can chill in Vallejo until your affordable housing spot opens up in 35 years.

Posted by Robert on Mar. 30, 2011 @ 8:09 pm

A lot of what you say is true. Especially in the first couple paragraphs. Just because a company goes public doesn't mean $4 billion floods the market. Usually only a fairly small percentage of the stock is available for sale.

One point of disagreement. You write that "[t]here's close to zero vacancy in SF, Marin and San Mateo counties." The Bay Citizen and Chronicle have run stories in the last couple days noting that San Francisco's vacancy rate is presently (and inexplicably) quite high. The housing economists don't know why. There's been conjecture that the high vacancy rate is caused by people who own property that don't want to sell, don't want to rent, etc., but the cause is pretty unclear.

http://www.sfgate.com/cgi-bin/blogs/ontheblock/index

Posted by The Commish on Mar. 30, 2011 @ 9:00 pm

So, when I see a twitter employee on an overcrowded Muni bus, how will I react to his/her not paying a fair share for the existence of that Muni bus and lack of funding for more busses?

Posted by Guestsf24hr on Mar. 30, 2011 @ 6:12 pm

What a bunch of crap.

Yesterday’s board meeting was a real time example of our former two party system devolving into one party – the corporatists. It was one of the most pathetic displays ever of pandering to the wealthy, in open public session no less.

Early in the meeting several supervisors expressed reluctant support of a resolution opposing the elimination of adult day health centers for the elderly, with Farrell explaining the board should offer solutions along with resolutions. Not one of those supervisors, all elected to represent the public, offered even one such suggestion to help the elderly, yet, just a short time later, they were falling all over themselves, fighting each other with suggestions to give as much money as possible to millionaires. Sickening.

These kinds of tax breaks have never, ever worked in the past. Just look at the state of public education in California after Prop 13 lowered property taxes in 1978. And, California taxed stock options until the dot com bubble in the mid 1990’s, which was a bust for the economy. The average tax payer lost homes, etc. while the wealthy tech owners sold stock and put that money in personal bank accounts before declaring bankruptcy for their businesses.

The Bay Area successfully achieved Silicon Valley before the 2000 dot com bust but all those tax breaks hasn’t helped the public there now, they’re budget is just as bad as San Francisco’s. We forget that many states tried to recreate this type of area by giving money but with little success: “In the struggle to become a technology hub, many cities and states used tax money to fund technology conference centers, advanced infrastructure, and created favorable business and tax law to encourage development of the dot com industry in their local. Virginia's "Technology Corridor" is a prime example of this activity. Large quantities of high speed fiber links were laid, and the State and local governments gave tax exemptions to technology firms. Many of these buildings can be viewed along I-495, after the burst, as vacant office buildings.” (from wikipedia)

And, all this happened well before San Francisco’s Gavin Newsom instituted taxes on stock options in 2004.

The Board of Supervisors, most especially Mirkarimi, should be ashamed of themselves.

Posted by Hope Johnson on Mar. 30, 2011 @ 6:12 pm

Well said Hope. Mirkarimi, et al, need to grow some backbones and start thinking about the people they were elected to serve, rather than ingratiating themselves to the financiers they are seeking for their imminent runs for office.

For example the Sheriff's race...

Posted by Eric Brooks on Mar. 30, 2011 @ 6:34 pm

San Francisco collects $350mil
In payroll tax a year. First year
Ipo tax on twitter is $100Mil.
Both companies are going to leave
Because of a tax that no one in
America charges. And it the employer
who pays- not the employee.

Posted by JohnC on Mar. 30, 2011 @ 7:27 pm

Let's see. Is the payroll expense tax 1.5%? $100M x .015 is $1.5M.

Oh, no! Poor, helpless Twitter would only get $98.5M. How could they survive?

America is going broke because they won't tax the rich and the rich won't provide decent paying jobs so the average person can pay enough to cover the loss. Did you not see Pres Obama in Brazil begging for their business or catering to China? Did you miss out on GE paying zero taxes and still wanting money back (GE's tax practices annoyed even Ronald Reagan).

Besides, if they were taxed, maybe the companies would be more realistic in the actual value of their company when issuing stock instead of jacking it up on paper only.

Posted by Hope Johnson on Mar. 30, 2011 @ 7:56 pm

I've lived in the City since 1986. I have never been more ready to leave. Politicians here are more self-centered than ever before, more out of touch with reality every day, and decidedly lacking in real world business skills. The Twitter tax fiasco is the latest example - a "Progressive" city falling all over itself to give a tax break to a company. It shows how hypocritical local politicos can be. People like Jane Kim suck right up to corporations like Twitter even though they would never give the time of day to other companies looking for a tax break.

There is not one member of the Board of Supervisors with a cogent, concrete plan to aid in job growth, the real engine of progress and community improvement. You can jack the parking meters all you want, and charge for the air we breathe, and you will never come close to the kind of revenue you can get if you create a healthy environment for businesses. Not an over-taxed, over-regulated, hostile climate, but a climate for responsible businesses that are dedicated to their community. Twitter is not one of those companies. Twitter held the City over a barrel and the city caved.

Posted by smb on Apr. 05, 2011 @ 3:42 pm