San Francisco’s got a money problem. Or, at the very least, it’ll have a money problem very, very soon.
The late San Francisco journalist, Herb Caen, once said, “One day if I do go to heaven...I’ll look around and say, ‘It ain’t bad, but it ain’t San Francisco.’” And, for the longest time, he was right. San Francisco was a beautiful city, built upon rolling hills on a small peninsula. San Francisco was the city of free love, gay rights, gender equality, vast diversities, peace, harmony, and a cornucopia of culture. And up until the Dot Com era, San Francisco was still stable in terms of economic equality and affordability. In a word, it was idyllic.
And then, because of the tech boom, the money started rolling in...
There was only one problem. Most of the tech companies were based in Silicon Valley, including eBay, Apple, Facebook, Google, Intel, Yahoo!, Netflix, HP, and Electronic Arts. In fact, 39 of the Fortune 100 companies are located in Silicon Valley.
Unfortunately, they weren’t located in San Francisco proper.
And the ones that were—most notably Twitter—complained about San Francisco’s payroll tax. This tax requires companies to pay the equivalent of 1.5% of all employee compensations. And, while this tax seems insignificant—almost innocuous—when it comes to multi-billion dollar companies, the tax is also based on stock option gains. A particularly important component for companies like Twitter looking to implement an I.P.O. And therein, as history tells us, lies the rub.
So, not surprisingly, companies threatened to leave downtown for the economically friendlier confines of Silicon Valley. Historically, these threats are most closely associated with football teams threatening to leave their city unless a new stadium is built. We’re looking at you Oakland Raiders, Minnesota Vikings, Houston Oilers, Baltimore Browns, and San Diego Chargers.
But Twitter, Uber, Square, and others were bringing in jobs and, thus, bringing in money. They knew this. The city knew this. And, as a result, they held San Francisco hostage. So, in 2011, San Francisco’s Board of Supervisors and Mayor Ed Lee made a controversial decision: They invoked a 1.5% payroll tax exemption for any company with a payroll greater than $1 million that moved into San Francisco’s dilapidated SoMa district. This tax exemption would come to be known as The Twitter Tax.
Source: SF Gate
At first, this tax was heralded as a rousing success. According to a reportby the San Francisco Controller’s Office, in 2013, the city brought in $7.6 million more in business tax revenue while only giving up $4.2 million in waived tax revenue. All in all, those numbers are a sign of progress for a flailing city.
But here’s where things get sticky: a year later, the San Francisco Controller’s Office published a similar report stating, because of the Twitter Tax, businesses in San Francisco’s Mid-Market district skirted paying nearly $34 million in taxes. It turns out Ed Lee and San Francisco’s Board didn’t account for the IPO offered by both Twitter and Zendesk, which accounted for $125 million. Just in case anyone is wondering, in San Francisco’s 2017 budget, it will cost $32 million to support the most vulnerable San Franciscans in getting and staying stably housed. This number—$2 million less than attributed to avoided taxes—includes funding for 500 new units of supportive housing, continuation of the Navigation Center, rental subsidies for homeless families and transitional age youth, as well as an expansion of medical respite services for homeless individuals with chronic medical conditions.
Last month, we did an article about the unequal distribution of wealth in society. And, suffice it to say, many of you were vocal about your opposition to such a theory. Which is more than fair. Ed T. was particularly confused.
Think about it like this, Ed: San Francisco is your parents, Twitter is your older brother, and you are you. Each week you and your brother, Twitter, are given $40 total for allowance. Disgruntled with such an arrangement, your parents realize $40 for allowance is too steep a price. But, since that was the agreed upon amount, they’re in a pickle. So, what do they do? They use your money to subsidize the money they have to pay to Twitter. So the next week your parents give them $30 and you $10. The week after that, your parents give Twitter $35 and you $5. Until, eventually, you’re given $1 and Twitter is given $39. San Francisco’s total payout is the same, but there is a gross difference in what Ed sees and what Twitter sees.
It’s still early, but it’s very possible we are about to witness a staggering unequal distribution of wealth in the city of San Francisco. What happens when those societies are created? Housing costs go up, poverty rates increase, and diversity declines.
Take, for example—and, keep in mind, these numbers have been adjusted for inflation:
According to the San Francisco Rent Board (SFRB), in 1996, the average cost of a 3-bedroom home in San Francisco was $288,240. By 1998, that number jumped to $361,410. In 1999, to $409,570. In November 2011, the same time the Twitter Tax went into effect, the average cost of a 3-bedroom home was $748,000. As of February 2017, that average had increased to $1,340,000, nearly a $1 million increase in less than 18 years.
Rent prices aren’t immune either. In 1990, the average rent for a 2-bedroom apartment in San Francisco was $975. In 2001, it was $2,400. Today, the median rent price for a 2-bedroom apartment is $4,350. Since 1979, the overall increase in rent is a staggering 452%.
Despite being one of the world’s wealthiest regions, there were 829,547 people living in poverty in the Bay Area in 2013. This is just over 11.3% of the region’s total population. In 2015, San Francisco had the highest poverty rate in the Bay Area, with an estimated 12% of its population living below the poverty line. In 2007, the poverty rate in San Francisco was just 9%.
And, according to the Silicon Valley Institute for Regional Studies:
With rents in some parts of the Bay Area 185% higher, home prices 250% higher, and the cost of goods and services 6% higher than in the United States as a whole—the ‘cost of living’ is undoubtedly different. As such, the poverty rate in the Bay Area could be as much as 3-4% points higher.
Between 2007 and 2013, the income ratio of highest earners to the lowest earners increased by 15.5% in the Bay Area, and the gap between high and low income households is much wider ($263,000 compared to $178,000 in the U.S.)
In the Bay Area, income inequality is partly a result of declines in shares of middle-income households. The share of middle-income households declined by 3.7% in the Bay Area between 2007 and 2013—nearly a 20% sharper increase than the U.S. average.
Twitter, though, has given back. They’ve opened a $3 million community center called NeighborNest, which provides access to computer technology, education, and training. However, NeighborNest provides only clients of their community-based partners such access.
They have an Ads for Good program, which offers non-profits a way to leverage the Twitter advertising platform to amplify their message. However, this program is by invitation only.
Reading the Twitter community initiatives is like reading the amenities of a hotel you could never afford.
We, at Pecorino & Eggs, don’t blame Twitter. We don’t blame Square, or Uber, or Zendesk. We don’t even blame Ed Lee. But trends are trends for a reason, and there doesn’t appear to be an end in sight for San Francisco. Tax breaks are becoming more prevalent for the rich and more astronomical for major tech companies. Poverty levels refuse to decrease. And people are being forced out of their homes, many of them middle-class, unable to afford the skyrocketing rent prices.
Mr. Mayor, it’s time to admit San Francisco’s middle class is at risk of extinction and fix the problem on your city’s horizon.