OpenAI and Anthropic could IPO for trillions. How will SF benefit?

San Francisco leaders have relentlessly promoted the city as the epicenter of the artificial intelligence industry. With local titans OpenAI and Anthropic poised for two of the biggest stock market debuts ever — potentially topping $1 trillion each — how much of that wealth will flow back to the city?

Not much — at least not directly — experts told the Chronicle.

A key reason: like most cities, San Francisco has no local income or capital gains taxes, though some business taxes are tied to stock-based compensation.

The city is already seeing job growth, office leasing and a scorching housing market, all tied to the AI gold rush. But much of the economic upside has already occurred as the companies have expanded and hired rapidly, and as employees get rich even before any initial public offering.

The overall economic impact of the next wave of IPOs may also be smaller than the comparatively smaller IPOs of the 2010s, which included Facebook at a valuation of $103 billion and Uber at $82.4 billion. 

That’s because far more employees benefited in the 2010s across dozens of companies that went public, compared with today’s AI duo, experts said. 

“Yes, a trillion dollars is a lot of money,” said San Francisco Chief Economist Ted Egan. But, he cautioned, “It’s liable to be a relatively few number of people — less than a couple thousand — with a lot of money.”

California does tax capital gains, which means that the state will benefit when employees and other shareholders sell stock that has appreciated in value. 

But in May, the California Department of Finance said the impact of IPOs on tax revenue was unclear given the “uncertainty” over their timing and valuation. Both companies have filed initial paperwork to go public, but neither has confirmed an IPO date, and the New York Times reported that OpenAI may wait until 2027.

And rather than anticipating something like the 2010s tech gold rush, state officials have warned of another potential dot-com crash.

A San Francisco company could once contribute a windfall to the city’s tax base by going public, because the city imposed a payroll tax that counted stock-based compensation. 

But in the 2010s, ahead of IPOs for companies including Twitter, the city started gradually replacing the payroll tax to make San Francisco more attractive to businesses. Voters fully repealed the payroll tax in 2020, replacing it with taxes based mostly on a company’s revenue. Stock-based compensation is no longer taxed directly, though it can still affect how much of a company’s revenue is subject to taxes. 

California stands to gain more directly at the state level. But state tax revenues have historically been volatile due to a reliance on wealthy residents who benefit largely from stock market swings. And rather than expecting even fuller coffers from IPOs, officials have warned of an AI bubble.

In May, the nonpartisan Legislative Analyst’s Office said “revenues are surging but appear unsustainable” across income, corporation and sales taxes. The forecast was $25 billion higher than in January, due almost entirely to soaring income taxes tied to “enthusiasm around AI and the related stock market boom.”

Soaring prices could be a warning sign rather than a cause for celebration, they warned.

“Booms almost always come with an eventual bust,” the office wrote. “It is now hard to ignore that the stock market appears, on its face, to be in a speculative bubble, rivaled only by the dot-com boom and the Roaring Twenties.”

Much can change after going public, as well. SpaceX’s $2.1 trillion initial public offering last month shattered records, but the market value of the company has plunged to around $1.7 trillion, a roughly 20% drop.

In many ways, the AI boom has already reshaped the city. 

OpenAI and Anthropic have been gobbling up San Francisco offices, leasing around 1 million square feet each in the last two years and paying millions of dollars in annual rent. OpenAI is now the second-largest office tenant in the city, while Anthropic is fourth. Only Google has more office space, while the two AI startups have around the same footprint as Salesforce, the city’s largest private employer.

“OpenAI and Anthropic have been rapidly increasing their workforces over the past year, and OpenAI is already bursting at the seams even with its additional office space,” said Michael Bernick, special counsel at Duane Morris LLP and former director of the state’s Employment Development Department. “The IPOs for both should contribute to additional direct hiring and expansion.” The companies each have hundreds of current job listings, largely in the city.

The IPOs could beget further growth, Bernick said. 

“With their newly minted wealth, current employees of OpenAI and Anthropic likely will at some point strike out on their own,” he said.  “It is in this ecosystem of small firms and startups that job gains will be the greatest, just as they were in previous technology booms in the city.”

Changes in the housing market are even more dramatic.

More than 140 San Francisco homes sold for $1 million or more above asking prices from January through June. The rental market has the lowest vacancy rate, just 2.2% of any major U.S. city, according to Apartment List.

The boom in mansion sales is generating cash for city coffers, thanks to a transfer tax rate that’s one of the highest in the country. It ranges from 0.50% to 6% for sales above $25 million.

One study found that California companies that went public from 1993 to 2017 accelerated price growth for homes near their headquarters just by filing for their IPO. In San Francisco, an IPO filing was associated with an estimated 2.4% rise in home prices after just half a year, with prices rising an additional 2.6% in the month after the IPO occurred.

UCLA finance professor Barney Hartman-Glaser, who co-authored the study, said part of the reason IPO filings bump up home prices is that some home sellers, hoping to capitalize on the IPO, delay listing their properties until the company goes public. That dries up supply and drives up competition.

But the bigger factor, Hartman-Glaser said, is simply that those companies’ employees are getting very rich long before the IPO. On top of salaries that have topped $1 million for AI stars, employees at Anthropic and OpenAI have already had some access to selling shares. In February, workers at Anthropic cashed in an estimated $4 billion in shares at a company-arranged sale, The Information reported last month.

“People have this narrative in mind that on the day Anthropic does its IPO, there’s going to be many new millionaires in the Bay Area,” Hartman-Glaser said. “The reality is those millionaires are already here.” 

Based on past blockbuster tech IPOs, Egan, the city’s chief economist, said the gains will be gradual. He expects some income to the city from taxes on luxury goods and an increase in property values, though these would be “hard to disentangle” from economic growth that would have happened regardless of the IPOs.

The biggest local impact may come when the IPOs encourage other AI firms and their backers to continue expanding in the city, hiring more highly paid workers and filling up offices and homes.

“You don’t want to discount the investment side of this money,” Egan said. “It’s probably bigger than the Lamborghinis and the yachts and the renovated houses.”

But those who benefit most from the IPOs may not be in any rush to spend their new wealth, said UC Berkeley economist Enrico Moretti.

“My guess is that a lot of that money is just saved and then invested,” he said. “Some is spent on things like luxury cars and vacation homes. It’s going to be a mix.”

Moretti said his past research found that donations to local charities increased around the time that companies in the area went public.

OpenAI was founded as a nonprofit and has pledged billions of dollars to support healthcare and economic development initiatives. Its charter says “our primary fiduciary duty is to humanity.” But the extent of its local giving, and that of its employees, is unclear, though the company did agree to give to a high-profile San Francisco effort to revive downtown. 

Sam Cobbs, CEO of Tipping Point Community, a leading antipoverty nonprofit, said tech industry IPOs haven’t typically generated as big of a short-term local impact as one might expect based on the valuation of the companies. That’s partly because newly wealthy tech employees often opt to put money in a donor-advised fund, a charitable account with tax advantages, and it takes time before “those dollars hit the street and start doing a lot of good,” Cobbs said.

However, he thinks the AI company offerings might be different from past tech public listings.

Cobbs pointed out that prominent leaders in the AI sector, including Anthropic CEO Dario Amodei and OpenAI CEO Sam Altman, have openly grappled with how AI will reshape the nature of work. That may prompt employees to turn toward charities when deciding what to do with their IPO proceeds, Cobbs said.

He said Tipping Point has talked with AI companies and the nonprofit has also received inquiries from their workers about how they can do the most good with their newly generated wealth.

“We have begun to field a few of those calls, though not as many as I would like,” Cobbs said. “Mostly what we’ve heard… is that employees have these donor-advised funds, they know that they’re there, but they don’t really have time to think about it yet.”

Tipping Point was founded more than 20 years ago by Daniel Lurie, long before he became mayor of San Francisco. In his time at City Hall, Lurie has embraced AI as a bright spot for the local economy, which is still struggling to rebound fully from the pandemic.

In a recent interview with the Chronicle, Lurie was clear about what he hopes the AI companies and their employees do as the IPO bonanza accelerates.

“The wealth generation is happening because you’re in the greatest city in the world, and we need you to invest here locally,” Lurie said, reflecting on how he viewed past IPOs when he ran Tipping Point. “My message to those companies that are going to see some incredible, incredible returns and outcomes in the coming six to 12 months: I want them to be involved in the work happening right here in the city that they love and that we all love.”

Ultimately, the biggest impact to San Francisco from the AI sector is likely to be in the job market — and that won’t be limited to the AI companies themselves, Moretti said.

“It will be this multiplier effect that we’ve seen in previous tech booms, where employment across the board increases as demand for restaurants, for construction, for healthcare, for education, for personal services, for entertainment increases,” he said.

But today’s job market isn’t seeing the same employment growth as the 2010s tech boom, largely because almost every tech giant has shed tens or hundreds of thousands of jobs since the pandemic. That is more than offsetting AI startup hiring, according to state data.

In other words, this tech boom has been, and will be, different.

Christian Leonard contributed to this report.