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The High Cost of Business in the City by the Bay

When one thinks of San Francisco and its mayor, Gavin Newsom, the first thing that naturally comes to mind is “sanctuary city.” That, and earthquakes. However, what most people don’t think about is that San Francisco is also the test-bed for a grand economic experiment that is apparently designed to answer one question: How many unfunded and intrusive government mandates on business will it take to drive small business out of a given locale? On top of that, it will also answer the question of whether or not you can tax and regulate your way to prosperity, which is an issue of growing importance these days. Let’s check the scorecard to see where Newsom’s experiment stands: 

  • Play or pay healthcare mandate. Effective January 9, 2008, the Health Care Security Ordinance (HCSO) requires Covered Employers to make health care expenditures for their Covered Employees and mandates the Department of Public Health (DPH) to create the Health Access Plan (HAP), now called Healthy San Francisco. Healthy San Francisco is only one option by which a covered employer can satisfy its obligation to make the required health care expenditure (HCE).  Covered Employers may also purchase health insurance coverage for their covered Employees, make payments to the City for the benefit of their Covered Employees, or make the required HCE in a variety of other manners.
  • Paid sick leave for employees. Proposition F, the San Francisco Paid Sick Leave Ordinance was adopted by San Francisco voters on November 7, 2006. Beginning February 5, 2007, it required all employers to provide paid sick leave to each employee who performs work in San Francisco.
  • Minimum wage mandate ($9.36 per hour). Proposition L, the San Francisco Minimum Wage Ordinance was adopted by San Francisco voters on November 4, 2003, and requires employers to pay employees no less than the San Francisco minimum wage.  The current minimum wage is $9.36 per hour.  The minimum wage rate is adjusted every January 1st for inflation.  
  • Commuter benefit mandate. The ordinance, which goes into effect in late December, seeks to help reduce San Francisco’s 2012 greenhouse-gas emissions by at least 20% from 1990 levels. It offers employers a choice of three options. The first is a program under which employees make pretax contributions to the federal legal limit of $115 a month to pay for mass transit expenses. The second is a program under which employers pay for employees’ transportation expenses and the third is where employers furnish transportation by setting up van pools for employees. The ordinance applies to employers with at least 20 employees and must be offered to employees who work 10 or more hours per week. 

So, by the end of this year, including their mandate on employee benefits for domestic partners, Newsom and the San Francisco Board of Supervisors will have five major business benefit and salary mandates on the books that cover health insurance, sick leave, wages and transportation.  

The Costs Involved: It’s Lives and Livelihoods, Not Money, that Counts

According to the Small Business Administration (SBA) the cost of Federal regulation—never mind the unnecessary State or Local burdens—is 45% higher per employee for small businesses than it is for large businesses. Now, add in the costs associated with State and, in the case of San Francisco, Local mandates and regulation and you can see how difficult it could be for small businesses in these high-regulation locales. This is especially troubling to Arthur Swanson, President of the San Francisco Small Business Network—a growing small business association of 20 business organizations that represents more than 19,000 small businesses in San Francisco—who writes, “small businesses are being challenged like never before, and many are questioning their ability to stay in business in San Francisco.  Over the past several years, the San Francisco regulatory environment has become increasingly oppressive for small business and unless we are able to change this situation, small businesses will close and/or flee from the city in even greater numbers.” 

Karen Kerrigan of the SBE Council holds that mandates of this sort negatively affect entrepreneurship and small business start-up and growth as they add major cost barriers to hiring new employees and force small and mid-size firms to accelerate their use of outsourcing and independent contractors. This is not the recipe for solid economic growth if your goal is high employment and the universal availability of health insurance and sick time to workers since independent contractors and temps—outsourced workers—don’t get such benefits (temps might, depending on the agency they work for, but that just raises their price.). 

The Bottom Line

For Newsom and his Board of Supervisors, it’s all about being green, social engineering and shielding poor “undocumented guest workers just looking for a better life here in the most prosperous nation in the world” from the evil ICE-men. In other words, it has far more to do with their workers paradise world view than with the actual world. Nothing in their mandates have anything of real benefit for the businesses that have to carry the burden for their “vision” of San Francisco. They count on San Franciscans loving their city and they count on like-minded fellow travelers making their way to the “City by the Bay.” Maybe when they arrive they will light a candle at the corner of Haight and Ashbury and join the cultural struggle against whomever it happens to be this week. That’s great, as far as it goes, and if that is the kind of town typical, run-of-the-street San Franciscans want, and they are willing and able to live with the consequences, more power to them. 

But small businesses will do what they need to do to defend themselves from abusive regulations, and they are. You can see this in the unemployment figures. Back in July, the San Francisco area unemployment rate of 6.1% predicted the rise in the national unemployment rate from its level at the same time of 5.7%. Given the importance of small business to the employment levels of an area, the difference between the local and national rates is an indication that small businesses are struggling in San Francisco. To deal with these struggles, many small businesses are changing the way they do business, especially in the area of personnel. Other small businesses are moving to more friendly business climes, and still others are going out of business entirely—all of which adds, in one way or another, to unemployment. This is the result of Newsom and Company’s experiment in over regulation. 

How much more of this—at any level of government—should American Small Business have to endure?