San Francisco’s economic prospects were shaped by the California Gold Rush, which turned the city into the financial and cultural center of Northern California. Presently, San Francisco’s economy includes companies in finance, Internet, life sciences, and technology, generating $360.3 billion in gross metropolitan product in 2012.44 San Francisco is a major international center for trade and serves as an important location for the international economies across a wide range of research and development and high-tech industries.
San Francisco’s proximity to San Jose, Silicon Valley, and cities in the East Bay region, such as Berkeley and Oakland, attract highly skilled workers, start-up companies, and entrepreneurs. San Francisco boasts an A-list of tech companies, including Dropbox, Square, Trulia, Twitter, and Yelp. The region’s world-class universities help attract talented and skilled human capital to the city. The city is home to more than 825,000 people, with 4.4 million in the metro area. Similar to other major cities, but to an even greater degree, San Francisco faces the challenge of high costs of living and doing business.
Among the cities under review, the 2014 Regulatory Climate Index ranks San Francisco in ninth position, with the first place representing the most efficient regulatory environment.
The overall score of the Regulatory Climate Index is the simple average of the scores of five areas of regulation. While San Francisco ranks ninth overall (score of 41.3), it ranks as tied for first in Starting a Business (99), 10th in Dealing with Construction Permits (0), eighth in Registering Property (51), ninth in Paying Taxes (10), and seventh in Enforcing Contracts (46). San Francisco ranks below the average performance of the 10 cities covered in the report in 2014, ahead of only New York City.
What San Francisco is Doing Well
- San Francisco is tied with Los Angeles for the top rank for Starting a Business. The city has streamlined the number of procedures, minimized the waiting time, and lowered the administrative costs for Starting a Business.
- San Francisco has streamlined procedures on such areas of business regulation as Registering Property and has minimized waiting time on Enforcing Contracts.
Where San Francisco Needs Improvement
- San Francisco ranks near the bottom across the areas of Dealing with Construction Permits, Registering Property, Paying Taxes, and Enforcing Contracts.
- San Francisco ranks poorly in Dealing with Construction Permits, which is a result of strict zoning regulations and environmental review for new construction projects. In total, approval for the pre-construction requirements takes 175 days of waiting and more than $100,000 in administrative fees before a permit is issued and building can begin. Some of the city’s processes can be attributed to its geographic location and prevalence of earthquakes. Therefore, building standards are strictly enforced, which is important to note in the context of this ranking.
- Small businesses transferring and Registering Property from a commercial transaction can expect a small number of procedures and significant administrative costs—specifically a real estate transfer tax. These costs are not as high as those in other cities but are still significant.
- While entrepreneurs do not face a complicated process for Starting a Business in San Francisco, they are subject to significant tax burdens. Small firms are saddled with high corporate taxes, a moderate employment tax rate, and a state franchise tax.
- San Francisco also ranks on the low end in performance of Enforcing Contracts, which can be attributed to a high number of procedures and moderate costs. These factors are compounded in the litigation phase.
The San Francisco Chamber of Commerce is leading an effort to spur economic development, ensure good governance, improve the business climate, and invest in the future of the city. The San Francisco Chamber is working with city government and other stakeholders to invest in infrastructure projects, to encourage the city to complete its three-year economic development plan, and to support local business development in the downtown community benefits district. Further, the San Francisco Chamber is joining city and statewide efforts to reform the California Environmental Quality Act to ensure that important projects that spur economic development and access to public goods do not fall by the wayside.
The San Francisco business community recognizes the city’s challenges, especially on the business and regulatory environment, to ensuring that businesses grow and prosper. Local businesses are championing tax reform, specifically a gross-receipts tax passed by voters that would replace the city’s payroll tax with an equitable alternative. The business community also supports regulatory reform that would allow for a reinterpretation of laws that have been affected by new technologies. The city’s License 123 has significantly streamlined local regulations and made a wealth of information on legal requirements for entrepreneurs available online.
The business community, city government, professional organizations, and other stakeholders must work together to make San Francisco a competitive place to do business in the future. Entrepreneurs and small businesses face high costs of living and of operating a start-up company in the city. In the United States, Greater San Francisco has the highest amounts of patents per capita and attracts more than a third of the nation’s venture capital. The future prosperity of the city and its residents relies on a symbiotic relationship among the business community, city government, and other key stakeholders.
San Francisco ranks near the bottom in its assessment of local regulations across four out of five areas of business regulation. The city performs at the top for Starting a Business but on the low end for every other category. In Dealing with Construction Permits, San Francisco could improve its process to streamline procedures, minimize waiting time, and lower costs. The city would improve its business climate by making the tax code friendlier for entrepreneurs. Overall, San Francisco is an important center for technology start-ups and other research and development–intensive companies. San Francisco should work to improve regulations for small businesses and entrepreneurs.
See the attached PDF below for more detailed charts and graphs relating to San Francisco and the 2014 Regulatory Climate Index.