A day before Uber's massive initial public offering, San Francisco proposed a bill seeking to tax the riding-hailing giant and other tech companies on the funds raised in their IPOs.

The so-called IPO tax, introduced by San Francisco Supervisor Gordon Mar in April, would raise the employer payroll tax on stock-based compensation to 1.5% from the current rate of 0.38%, restoring it to the rate it was in 2011, just before the city cut the tax in a bid to attract more tech business.

The rate hike would be retroactive to May 7, thereby applying to Uber's IPO, which raised $8.1 billion. The tax would kick in for businesses as employees exercise their stock options.

Based on Mar's calculation, the tax would generate between $100 million and $200 million for the city in its first two years. He has said he wants the city to put the money into a new “shared prosperity” fund that would go toward low- and middle-income workers and families, small businesses and affordable housing.

The full board is expected to vote on the bill within the next two months. If it is approved by six supervisors, the proposal would go on the November ballot.

The Recorder caught up with Baker Botts' corporate partner Sam Dibble to learn more about the bill and discuss the potential impact if it gets passed.

As an attorney and a charterholder under the Chartered Financial Analyst program, Dibble has over two decades of experience advising clients on corporate transactions matters, including leveraged buyouts, asset sales and other types of mergers and acquisitions.

Dibble's answers were edited lightly for style and clarity.

How does the IPO tax work?

Sam Dibble of Baker Botts. Courtesy photo

Dibble: The amount of that equity compensation for companies that are doing IPOs is usually measured by the difference between the exercise on the stock options—or the restricted stock that has been granted to the employees—and the value of that stock when the IPO actually happens. So what the city is trying to capture is this equity participation piece of what goes out to the worker that is not paid in cash salary.

The one thing that is important about this employment compensation piece is that, of course, unlike salaries that are paid on a biweekly, weekly, or monthly basis, these IPO taxes are going to be very sporadic, and they are going to be concentrated on few companies and only during the window where these IPOs are actually occurring.

Why raise the tax now?

Dibble: We had a wave of IPOs already, there are a number of other ones in the works—again, involving San Francisco-based businesses. We have seen Uber, Slack is in the process of doing this, Lyft—there are many of these tech companies that have now got to the point where they are going to have a—hopefully successful—IPO. This is the moment where this tax would actually apply. This hasn't been an issue for the last six, seven years since the tax rate was lower because it wasn't a very strong IPO market, and now it is. [If] the city is going to do anything in the way of a tax change here, this is the time. If they wait another two or three years after all the IPOs occur, that is the equivalent of closing the barn and gate after all the horses have all left. Because IPOs don't happen that often and once they do happen, they tend to not happen again, at least not for the same company. … For the most part, this is a one-shot deal. This is the opportunity for the city, if they are going to do it at all, to capture the tax revenue.

How much money are we talking about here?

Dibble: I think Supervisor Mar is thinking it is going to be $200 million in the first year and a $100 million in the year after. Those are his numbers. That is assuming it gets approved by the voters and that it is retroactively effective.

Those numbers aren't going to continue. Like I said, this is a very lumpy, more-or-less one-time-only tax, so I would say the best-case scenario is the $300 million that Supervisor Mar has been talking about, because how long is the IPO wave really going to continue with tech companies based in San Francisco. It is also fairly easy to time your exit from the San Francisco market with your IPO because these companies have control over when they actually do the IPO. I would not understate the mobility for people at the corporate level, and individual, whoever else to choose to do business somewhere else, whether it is still in the Bay Area—places like Oakland, San Jose—or somewhere else in the East Bay that's looking to develop its economy and have access to workers and transportation. Or in a place like Texas or Seattle, where there are no income taxes at all.

I think this type of IPO tax is interesting to watch because it is the type of thing that can be fairly easily planned around if that is what companies and their employers and employees choose to do.

What will happen is the city pass the bill?

Dibble: Maybe if the proposal is passed by the board of supervisors and the voters, that in fact they get hit with the exact same tax that was in place very early on without any benefits from the cut [in 2011] … a lot of that could impact the future credibility of the city.

It is a little bit of a “boy crying wolf” effect, where the city may lose all the credibility if they to go back on their words here.

How likely is it that the bill passes?

Dibble: Some really important people haven't taken a stand on it. I don't think Mayor Breed has endorsed it, or [said she is] against it. I think there is a desire to find new ways to raise tax revenue in San Francisco for various programs and goals that we have talked about. I think especially the folks that have a longer political career, probably realize that they are going to be held accountable during the downturn as well, especially if these companies leave town. They won't be able to blame it on someone else.