City Council approves tax break for Berkeley startups. Here’s what it could cost.

The Berkeley City Council signed off this week on a proposal to expand a tax break for research and development startups that became a flashpoint in the campaign for mayor.

Berkeley has since 2019 allowed certain smaller startups to exempt up to $1 million worth of government grants from city taxes. The new policy takes that exemption a step further: It eliminates the $1 million cap, expands the exemption to grants from philanthropic organizations and removes a provision that limits eligibility to companies with less than $100,000 in gross receipts.

City economic development staff say Berkeley has forgone about $9,000 in tax revenue per year on average because of the exemption.

And they say the financial impact of broadening the program won’t be much bigger: The city would have forgone $21,600 in the 2022 fiscal year and $61,200 in the 2023 fiscal year if the expanded policy had been in place then, Elizabeth Redman Cleveland of Berkeley’s Office of Economic Development told Berkeleyside. That translates to tenths of a percent of the roughly $20 million per year in business license tax revenue the city takes in annually.

At the City Council meeting where the new policy was approved, Mayor Jesse Arreguín and other supporters said it represents a small but meaningful step to encourage startups, many of which emerge from UC Berkeley and Lawrence Berkeley National Laboratory, to stay local.

But former councilmember and mayoral candidate Kate Harrison rallied opposition to the expansion last month, writing in an online petition that it amounted to “a giant giveaway” to big businesses that would “leave our city facing a budget shortfall.” The proposal had been scheduled to go before the council at an October meeting, then was pushed back to this week.

Arreguín charged at the meeting Tuesday that Harrison’s email amounted to “misinformation” that “whipped people into a frenzy” by distorting the impact of the proposal in an effort to boost her mayoral campaign.

“It’s not some boondoggle, it’s not going to cost the city lots and lots of money,” Arreguín said of the new policy. “This is in the public interest, to help grow our innovation sector.”

Harrison, who voted to approve the initial tax break in 2019, wrote in an email that she would have wanted to make changes to Arreguín’s proposal, such as limiting how much grant revenue companies could exempt. As for Arreguín’s criticism, Harrison wrote, “I am shocked that the mayor considers questions from the public and mayoral candidates about city finances to be out of bounds.”

Election results as of Monday showed Harrison running several thousand votes behind the close race between Councilmember Sophie Hahn and nonprofit consultant Adena Ishii.

Several opponents of the tax break criticized it during the public comment period of Tuesday’s meeting, echoing the concern that it amounted to a giveaway to businesses and that the city should have provided more information about its financial impact. They were countered by supporters who said it stands to make Berkeley a more attractive place for early stage companies and will boost the local economy.

The council voted unanimously to adopt the proposal.