Bay Area making life difficult for tech firms

San Francisco bay bridgeSACRAMENTO – In most of the country, a region’s “big” industry – think automotive companies in Michigan’s heyday, the oil business in Houston and entertainment in Los Angeles – is treated with deference by locals. Sometimes that attitude morphs into support for subsidies or even indifference to pollution or other problems. But it’s rare to see city leaders purposefully stifle companies that produce a large share of good-paying jobs and tax revenues.

Enter San Francisco, where officials often don’t play by the normal economic rules. No metropolitan area is more closely identified with the burgeoning high-tech economy than the Bay Area. Yet in June, three of the city’s 11 supervisors proposed a 1.5-percent payroll tax that would be imposed specifically on technology companies that earn $1 million in gross receipts.

This “tech tax” was designed to raise money to battle the city’s homeless problem. But the economic rationale was epitomized in a statement by the bill’s author, Supervisor Eric Mar: “The rapid tech boom in our city and region threatens our city’s ability to thrive and prosper,” he said, in a Guardian report. “Five years after the boom, it’s time for San Francisco to ask the tech companies to pay their fair share.”

Earlier this month, the measure that would have placed the tax proposal on a citywide ballot was defeated in committee. Enough San Francisco legislators apparently understand an idea that goes back to Aesop’s day: Strangling a golden goose is a quick route to poverty. But this won’t be the last San Franciscans will hear about such a tax increase, nor is it the only example of increasing hostility by city officials and local activists to the tech industry.

“Corporate buses that Google and other tech companies (use) to ferry their workers from the city to Silicon Valley, 30 or 40 miles to the south, are being targeted by an increasingly assertive guerrilla campaign of disruption,” according to a 2014 Guardian article. Protesters have blocked buses. A window was busted on one of them. As the article put it, protesters complain that “the tech sector has pushed up housing prices in the city and made it all but unaffordable for anyone without a six-figure salary.” The Google buses make it easier for tech workers to live in beautiful San Francisco, rather than in the more mundane San Jose area.

airbnbLikewise, San Francisco supervisors recently passed a law that legalizes short-term rentals in the city, but imposes restrictions on them. Property owners can only rent out their entire house 90 days a year. It must be their primary residency. They must pay hotel taxes. They must follow the city’s rent-control laws. The most controversial element: Hosting sites, such as Airbnb and HomeAway, would be responsible for making sure hosts – i.e., the people who post their homes for rent on company sites – are registered with the city. Airbnb filed a lawsuit arguing the law violates the First Amendment and Communications Decency Act. The latter is a 1996 federal law that protects websites from being held accountable for what individuals post on them.

Advocates for the short-term rental law use a similar argument as those who defend the “tech tax” proposal. They blame these rentals for depleting the city’s housing stock and driving up the cost of apartments. “It is ultimately about corporate responsibility,” according to Supervisor David Campos, quoted in the San Francisco Chronicle. “About an industry that has made and continues to make tens of millions of dollars in this line of work taking responsibility for the negative impact that they are having on the housing stock.”

Once again, many San Francisco officials see thriving tech companies as a problem. They blame their success for driving up housings costs. Apparently, the best way to drive down housing costs is to drive businesses – and residents – out of the city. It’s the kind of zero-sum rationale that’s fashionable in San Francisco. Yes, demand drives up costs if – and it’s a big if – supply remains the same. Thanks to strict building restrictions and growth controls throughout the Bay Area, the supply of housing is largely capped.

Within the city of San Francisco, rent control is a staunch disincentive for property owners to rent out their apartments or to invest in the construction of new ones. In essence, a tenant can stay for many years in apartments at below-market rates. Rent increases are capped. Evictions are difficult, thanks to the city’s notoriously pro-tenant rent laws. Over the years, the city has only built a tiny portion of the units needed to keep up with the population growth. The permit process for building anything is costly and cumbersome. Even some state legislators from the Bay Area recognize the need to build more supply, but most proposals are modest or focus on building more subsidized units.

“(O)ver the long run, setting an artificially low price on a product (in this case, apartments) guarantees that the supply of that product will diminish,” explained Peter Byrne in a prescient 2000 San Francisco Weekly article. “Among other things, when people are unable to move – due to excessively high rents – they tend to stay in one place, that is, to hoard their apartments, effectively removing these units from the market.”

Property owners become afraid to rent out their apartments. It’s one thing to rent out an apartment for market-based rents. You can always raise the rent after the lease is up or give tenants notice and move into the building. But in San Francisco, such reasonable behaviors are restricted. As a result, “thousands of units are simply being kept off the market,” according to a 2014 report by KALW. “Some estimate up to 10,000 of these units exist. Many sit unrented because tenants are proving too risky an investment for some property owners.” Tenants can get free attorneys and even tie up legitimate evictions (for nonpayment) in a costly legal process.

By contrast, in the booming city of Tokyo, home prices have been steady for 20 years, according to a new article by Alex Tabarrok for the Foundation for Economic Education. That’s because the city “has a laissez-faire approach to land use.” In 2014, it issued more than 142,000 building permits – far more than the entire number of permits in all of California that year. Yes, even a densely populated city with virtually no vacant land can build its way out of its housing crunch. Keeping supply up also makes it easier to deal with the homeless issue.

The proposed “tech tax” is counterproductive for any number of reasons. “It’s solving a housing crisis by hurting an economy,” said Mark Pincus, founder of Zynga. As Forbes’ Travis Brown reported, “The same innovative individuals who would be paying this 1.5 percent payroll tax already pay 13.3 percent on their earned income (the highest rate in the nation).” San Francisco is a great city, but there are other great cities competing with it for these jobs.

The tax is dead for now, but the same illogical reasoning – and fundamental problem – is alive and well. Why, yes, it might be possible to at least marginally reduce housing prices by chasing jobs and taxpayers away. But is that a road the city wants to travel? Isn’t it far better to try something sensible and create new incentives to create rental properties?

Steven Greenhut is the Western region director for the R Street Institute. He is the founding editor of CalWatchdog. Write to him at [email protected].

8 comments

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  1. Queeg
    Queeg 9 August, 2016, 10:37

    Comrades

    Command economies require control, bogey men, hate and envy. And it always comes to punish, regulate, extort the innovative and successful. SF is a disgusting, anti religion, immoral, filthy, personally unsafe cesspool to be shunned not visited for any reason.

    Reply this comment
  2. JPR!!
    JPR!! 9 August, 2016, 18:05

    Is this any real surprise? STATE Gov has killed off a million mfg jobs over the last 10 years. I am a 40 year Semi company vet. Early on we had thousands of employed middleclass employees in the involved in circuit production. As Sac raised taxation and sent out an ongoing stream of regs, production moved out. Today not one circuit is produced in CA. CA is now a one party Progressive state generally run by State unions and environmentalists How many more billions of taxation will be on the Nov ballot? Expect more state economic decline!.

    Reply this comment
  3. Spurwing Plover
    Spurwing Plover 10 August, 2016, 06:41

    Califirornias run by a bunch of total airheads(Moonbeam and Newsom)the politicians are nothing but tax and spend liberal demacrats and the pathetic fools in Sacramento,San Francisco and Los Angeles still vote these scoundrels into office

    Reply this comment
    • Queeg
      Queeg 10 August, 2016, 10:37

      Comrades

      The power of your ever shrinking purse; buy nothing in bloated Sacramento, tourist trap San Diego, toilet SF, fourth world LA.

      Reply this comment
  4. Mike
    Mike 10 August, 2016, 17:33

    As the high tech companies automate more and more of their jobs, and the state incents immigrants to move in, screw, and breed…there will be social unrest . Expect cacasian govt retirees, senior citizens to be executed by ignorant mobs with hammers, axes, and screwdrivers. The state govt will ignore, just the logical endgame for white privilege.
    Brown will enjoy retirement volunteering at a nude day care center Mon.-Fri.

    Reply this comment
  5. Queeg
    Queeg 10 August, 2016, 20:47

    Comrades

    Illinois or Rhode Island are the future. Anything consumed or owned by anyone are tax, regulation, fee, public sanction targets.

    So now feel guilty and shun your economic privledge-

    Reply this comment
  6. Howard Epstein
    Howard Epstein 12 August, 2016, 09:29

    Eric “Happy Meal” Mar and the other “progressive” supervisors hate successful productive people. Deep down inside they believe “From each according to his ability, to each according to his needs.” If you check their bios you’ll see that most of them have never had jobs at for profit private sector companies, large or small. Mar taught ethnic studies at San Francisco State University. The “progressives” in reality are regressive job killers.

    Reply this comment
  7. Mike Lorrey
    Mike Lorrey 27 August, 2016, 10:56

    Given the homelessness problem is due to a) excessive welfare benefits granted by the city, b) the city’s unsustainable policy as a sanctuary city, inviting unemployable illegal aliens and convicts to live on its streets, and c) unsustainable housing, zoning, and other regulations whose only purpose is to drive up rents by restricting supply of housing to benefit a narrow segment of wealthy property owners, how about a rent tax? Have a 5% tax on gross receipts of rent payments, and let landlords deduct 1% for every 5% of their properties that are dedicated to affordable housing programs. Then impose a 5% dead inventory tax on foreclosed homes that remain unsold for more than six months, unless the banks are employing homeless persons to live-in and caretake the properties. Then the city can go about dismantling its sanctuary city policy and its restrictive housing and zoning regulations.

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Steven Greenhut

Steven Greenhut

Steven Greenhut is CalWatchdog’s contributing editor. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”

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