In 2018, when San Francisco voters approved Proposition C, the largest tax increase in city history, the prevailing mood was jubilant. The measure levied an additional tax on businesses generating over $50 million in gross receipts (revenue a company receives from all its activities before any expenses or deductions are taken out) and allocated the proceeds to homeless services — funding that would “almost certainly” reduce the number of people sleeping on the streets, Ted Egan, the city’s chief economist, declared. He conceded it would push a tiny number of jobs out of SF (a “0.1 decline, or a few hundred jobs”). But it would create far more by increasing the city’s attractiveness to tourists and retailers. Salesforce CEO Marc Benioff, the “Yes on C” campaign’s largest financial benefactor, concurred. “[Prop C] funding will address the [homeless] crisis from every angle,” he wrote in an NYT op-ed. Those who opposed it were either selfish or short-sighted. “When it comes to Prop C,” Benioff would tell journalists, “you’re either for the homeless [or] you’re for yourself.”

Since then, the measure, which generates around $250 million per year, has nearly tripled annual spending on homelessness. What does the city have to show for it? On the body count front, apparently nothing. According to newly released data, the city’s overall homeless population has actually increased by 7% since 2022 — despite Prop C money flowing to the Department of Homelessness and Supportive Housing (HSH) since 2020.

Much was made of the “oversight” and “accountability” the committee tasked with overseeing Prop C funds would bring to homeless services in SF. But nothing of the sort happened. From the outset, conflicts of interest abounded on the “oversight committee,” where members like Coalition on Homelessness executive director Jennifer Friedenbach — whose organization sues the city whenever an encampment is cleared — used their authority to greenlight grants to their own nonprofits. (Cristin Evans, a volunteer at Friedenbach’s nonprofit, also sits on the board of a separate HSH "oversight committee" created in 2022.) Unsurprisingly, a city audit released this month found HSH continues to fail to adequately track where its grant money goes. As Garry Tan, CEO of Y Combinator and a prominent local political activist told us,

Prop C’s legacy was to push legitimate fintech businesses out due to the gross receipts tax. Taxes aside, the worst outcome [of Prop C was] that the Coalition on Homelessness has wide latitude to accelerate harm in SF by [its] maximalist approach that doesn’t fund shelters or recovery.

On the employment front, things are similarly bleak. Hospitality and entertainment jobs are up (after plummeting during the pandemic), but the tech industry has cratered, with San Francisco and San Mateo counties losing 14,300 information sector jobs between February 2023 and February 2024 alone. “Tech is actually much worse than [projected] before,” Egan told The Standard back in March. “There’s no sign of it recovering at this point.”

In other words, the legacy of Prop C was not that billionaires finally paid their ‘fair share’ to help the indigent; it was that a confiscatory tax, used to fund a now-$700 million a year “homeless services industry,” drove successful tech companies and jobs out of the city. But even this high-level takeaway obscures an arguably more important truth about Prop C: within tech, the tax didn’t affect all companies equally. It’s no coincidence that the most outspoken opponents of the measure within the industry were fintech executives like Jack Dorsey and Patrick Collison, while its most fervent proponents were SaaS executives like Benioff and Cisco CEO Chuck Robbins. Because of its tiered structure (and the nature of gross receipts taxes), Prop C disproportionately affected fintech startups and, generally, drove them out of the city in larger numbers than other software firms. Here’s how the damage broke down.

The mantra repeated by Prop C defenders throughout the campaign was that the measure would only impose ‘a small tax’ on the city’s wealthiest businesses. But this was misleading. In fact, Prop C taxed businesses based on a tiered system that imposed differential rates on retailers, IT companies (which included SaaS firms), financial companies (which included fintech startups), and so on. Whereas information tech companies like Salesforce faced an 0.5% tax rate on their gross receipts, smaller fintech startups like Block and Stripe, which were classified in the financial services category, faced an 18% higher tax rate of 0.6%.¹

As Owen Thomas explained in the Chronicle, the revenue taxed at these rates was also calculated differently — fintech firms had to pay the tax on the share of their global revenue that equaled the share of their payroll in SF, whereas IT firms paid the tax on gross receipts based 50 percent on their share of sales in SF, and 50 percent on their proportion of local payroll. Since many fintech startups like Block had a higher percentage of SF-based employees than multinational SaaS firms like Salesforce or Cisco, this meant they had a dramatically higher tax liability under Prop C, with some scenarios resulting in fintech companies paying double the amount much larger SaaS firms would pay. Thomas explained it thus:

Roughly two-thirds of Square’s 2,338 employees are based at headquarters; for Salesforce, it’s about 28 percent of 30,000 global employees. Though neither breaks out sales by city, it’s easy to guess that their hometown accounts for a tiny percentage of sales. That means that Square would cut its gross receipts tax by more than half if it were put in the same category as Salesforce.

Further, fintech companies often generate substantial gross receipts by processing large volumes of low-margin financial transactions. Since Prop C taxed gross receipts, rather than net income, many fintech firms faced a heavy tax burden relative to their profits. On the other hand, the average SaaS firm’s gross receipts generate tend to be much more closely correlated with net revenue.

Jack Dorsey, CEO of Block (formerly Square), made these points clearly during the debate over Prop C. “Hypothetically,” he tweeted, “Square could pay over $20 [million] more in 2019, while Salesforce (4x bigger than [Square]), pays less than $10 [million]. Taxes would grow at rates multiple times our [adjacent] revenue, which no company can sustain.”

To this, Benioff side-stepped and invoked the homeless. “These tech CEOs, they need to realize if they want to do business in San Francisco…then they should be more than happy to give a small amount — which is what it is for these companies — to help us focus on our number one issue [homelessness],” Benioff told CNN, shortly after Dorsey’s tweets went live.

After Prop C passed (and surmounted a two-year legal challenge), the fintech exodus was swift and definitive. Stripe moved its headquarters to San Mateo County in 2021, while Block delisted San Francisco as its official headquarters in 2022 and allowed its lease on 470,000 square feet of Mid-Market office space to expire last fall. PayPal vacated 80,000 square feet of office space in 2022 as well, and encouraged employees to move closer to its headquarters in San Jose. Coinbase, Brex, and Credit Karma all left the city (though Brex has since returned). Chime, another fintech startup that leased its downtown office space, recently filed a lawsuit against the city to recoup $7.2 million in business taxes it alleges were wrongfully withheld. (In fact, since Prop C funds were released from escrow in 2020, the city has paid out at least $44 million to companies in business tax refund settlements.)

Other tech companies eventually followed suit; Meta listed 435,000 square feet of downtown office space in 2023 and announced its intention to “recalibrate” to other parts of the world, Snap let an almost 300,000 square foot lease downtown lapse in 2022, and even Benioff’s Salesforce recently subleased over 400,000 square feet of office space on Fremont Street.

San Francisco now faces record-high office vacancy rates of around 37%, plummeting tax revenue, and a two-year budget deficit hovering around $800 million. The city’s population, which plunged in 2020, has yet to bounce back to pre-pandemic levels. Homelessness remains as intractable as ever, despite the HSH’s $1.3 billion two-year budget and the research produced by Benioff’s $30 million UCSF “Homeless and Housing Initiative,” which has, to date, published just a handful of reports detailing different demographic groups’ experience of homelessness throughout California. (As we’ve covered elsewhere, some are riddled with methodological flaws.) Faced with the gravity of the spiral, local politicians are now calling for business tax reforms and exemptions in an attempt to mitigate the damage. “San Francisco must adapt, and [business tax reform] will position the city for economic recovery,” said Supervisor Mandelman recently. At last, it seems, sanity may return to the city. Better late than never.

—Sanjana Friedman

--

¹ These differential tax categories were established under Prop E, a 2012 measure that replaced the city’s flat-rate payroll tax with a gross receipts tax that varied by industry.

An earlier version of this article incorrectly stated the SF Examiner endorsed Prop C in 2018. This has been corrected.