Tuesday, January 31, 2012

RE: San Jose Weighing Business Tax Increase

An article appeared in last week's San Jose Business Journal about San Jose considering a tax increase for businesses. Surprisingly, the city collects only $10-11 million of business tax revenue a year, much less than other cities in the bay area (Oakland collects $51.5M, SF collects $391.1M). The proposal currently being discussed is a way to double the amount of revenue that San Jose collects from the 54,800 businesses, the largest number of any city in the Bay Area.

I actually have to strongly disagree with this idea. Right now there are many regions of San Jose with office vacancies hovering around 25%, dramatically higher than many other Santa Clara County cities like Palo Alto and Mountain View. Raising business taxes in any way, will simply provide another reason for businesses to not come to San Jose. This isn't a possibility, this is an economic fact. You cannot raise taxes without a negative consequence.

The are two possible exceptions to what I said above:
1.) If San Jose is considered a luxury "product or service" where increasing the price makes it more attractive instead of less (think Bentley, Gucci, etc.). I don't think this is the case.
2.) If the money raised from businesses can be used to provide an improvement to those businesses greater than the additional cost they are paying (think Downtown's PBID)... this is unlikely since the money will likely go straight to the deficit.

Okay, now that I bashed this idea let me offer 2 suggestions:
1.) Use supply and demand to determine when to raise taxes. For example... when office vacancies hit 5%, then slowly increase the tax while lessening the negative impact. Don't do it when we desperately need these spaces to be filled.
2.) Sell additional services to businesses that companies would gladly pay a premium on. A great example is permitting, which has been a San Jose weakness for some time. Let a large company pay substantial extra fees to expedite the permitting process and move a project along faster (have nightshift and weekend employees if needed). The additional money those companies will get by opening the door faster will easily justify whatever extra amount they have to pay. We also want a brand image where San Jose is the best possible city for leading companies; enabling them to execute and build faster is perfectly inline with this image.

Source: SJBJ


  1. I agree that this is a terrible idea. Do you know if the tax will need to approved by voters, or is it up to the council? I want to know if I should start drafting letters to council members.

  2. I completely agree and don't think it would pass a 2/3 vote (almost positive it needs a general vote). Another take-away from the article - the size of each city's general fund. Where does SF get all that money? $400M is business tax, tourism is probably a big chunk... still I wouldn't have guessed they have over three times as much as SJ. Double, maybe.

  3. I just read the SJBJ article and answered my own question - it would need to be put up to voters.

  4. If lower taxes attract more business, how come SF is a more lively, densely populated city that collects a whole lot more tax revenue than, say... yawn... San Jose?

  5. Marc, you're missing the point. If SF had lower taxes than it does today, more businesses would want to locate there. If they raised business taxes right now, there would be pressure on businesses to move elsewhere. How much pressure depends on several variables (amount of increase, demand elasticity, etc). There were several companies that were considering moving out of SF specifically because they didn't want to pay extra taxes after emerging from startup mode and making over $250k a year (I think Twitter was one of them). Several of those companies got tax waivers from SF to keep them within the city.

    Business tax alone won't determine how dense or lively a city is, it's one of many, many variables. The point is higher business taxes always cause a negative pressure on demand for businesses to locate in a particular city.