San Francisco Eyes Tax Reform as Key to Recovery

San Francisco’s Controller’s Office has weighed in on what may be the city’s most viable path to recovery: meaningful tax reform that diversifies the tax base while paring stratospheric business taxes.

Here’s what we mean by stratospheric: a tech company with $30B in sales and 10,000 local employees pays 20 times more in local business taxes that it would if it were located in Mountain View, 200 times more than in San Jose and 1,300 times more than in Sunnydale.

That’s one of the findings of a report issued this week by the Controller’s Office in response to a letter of inquiry from Supervisor Rafael Mandelman, according to a report in the San Francisco Standard.

San Francisco, which started the decade with the highest business tax burden of any city in California, has raised rates on existing taxes while continued to pile on new business levies during the pandemic.

City voters have approved the creation of a Homelessness Gross Receipts Tax, a Commercial Rents Tax and something called an Overpaid Executive Tax which targets companies where there is a huge spread between what the top execs get paid and the average workers earn.

As a result, San Francisco is relying on an extremely volatile base—and handful of large tech companies who can quickly relocated or convert to remote work—for the lion’s share of business taxes it desperately needs as businesses including offices and retail stores desert the city’s struggling downtown.

Business advocacy groups say raising taxes has become a political football.

“We’ve had a series of vindictive, economically short-sighted, politically motivated tax proposals,” said Wade Rose, the president of Advance SF, according to the Standard’s report. “Now, we face a situation where the city does not have a diverse tax base, is facing more volatility and has pretty much priced itself out of the market for large companies to locate here.”

In presenting the Controller’s findings, Mandelman said “our unique vulnerability to a few companies moving their headquarters out of San Francisco demands that we urgently explore new ways to encourage businesses to locate and grow in San Francisco, as well as strategies to make our tax base more resilient.”

Mayor London Breed has proposed an overhaul of the city’s tax structure, to be developed into a tax reform ballot measure that will go to voters in November 2024. Breed has proposed to delay a Gross Tax Receipts tax increase for certain industries and to provide a temporary discount of the tax for new businesses locating to downtown.

The Gross Receipts Tax is the city’s primary business tax, generating about $800M annually for the city. Nearly 70% of that revenue comes from three tech-oriented sectors: Information (33%); Financial Services (19%) and Professional, Scientific and Technical Services (17%), according to the Controller’s Office.

According to JLL, those also are the three industries that were the quickest to embrace work-from-home policies during the pandemic—which the Controller’s report says cut Gross Receipts Tax revenue more than in half in 2021.

Any significant tax reform will need to be approved by the same voters who have been rubber-stamping increased business taxes. Mayor Breed said it would be “insane to do the same things and expect a different outcome.”