San Francisco Has Ditched Its Dumb 'IPO Tax' (For Now)

The tax was actually on much more than initial public offerings of stocks, and likely would have driven the next generation of startups to locate somewhere else.

The city of San Francisco will abandon a controversial plan to ask residents whether they wanted to tax tech startups going public for the first time.

The so-called "IPO Tax" (that's shorthand for "initial public offering") was slated to go on the city's ballot in November, but city officials pulled that proposal this week. Instead, a more generic tax on business revenue will be put in front of voters later this year. Both are attempts by the city government to capture a portion of the one-time windfalls that can occur when tech startups based in the city—think Uber, Pinterest, and other so-called "unicorns"—hit the stock market for the first time.

City Supervisor Gordon Mar, who sponsored the proposal, told Recode earlier this year that the 1.5 percent tax would net $50 million annually for city services. That money would provide for "shared prosperity," he said, suggesting that it could be put towards affordable housing projects in the famously expensive Bay Area real estate market.

But the proposal was never really a tax on IPOs at all. Instead, it would have hiked an existing city tax on stock-based compensation, meaning that all businesses who pay employees and executives with stocks would have been subject to the levy. Calling it an "IPO tax" was never anything more than clever marketing by city officials.

Ultimately, the city's besieged business community won out. For now.

Mar's spokesman told The Wall Street Journal that removing the tax from the November ballot was only a temporary setback and that Mar intends to have a similar measure ready for the 2020 ballot.

It's likely true that we haven't seen the last of city-level efforts to hit tech companies with new, higher taxes. Indeed, last month's announcement of the "IPO tax" was cheered by progressive commentators as a productive way to eat the newly rich of the tech world.

But San Francisco would be wise to leave the IPO tax in the trash can. For one thing, the city should look to its own history for a lesson. Tech companies dominate modern San Francisco because the city cut taxes to lure them there in the first place. Sure, some of the big ones might stick around now that they're established, but there is nothing that guarantees the next round of startups will set up shop in the Bay. Capital is highly mobile, and small tech firms—almost by definition—have the ability to locate anywhere. "Firms already hampered by the high cost of operations here will have another reason to expand or relocate elsewhere," the San Francisco Chronicle's editorial board wrote in May.

Second, the tax wouldn't have done much to fix the city's housing and inequality issues. Solving that will require repealing loads of zoning codes and regulations so that more housing can be built. As Reason's Christian Britschgi has reported, San Francisco has held up the development of new apartment buildings for reasons as absurd as where shadows from the structure will fall.

Soaking tech startups won't fix that.

Kerry Jackson, a fellow with the free-market Pacific Research Institute, calls the IPO tax "outrageous and extortionate."

"When politicians see wealth being created in the private sector," Jackson writes, "they always find a way to get their hands on the dollars, though they never earned a cent of the income."