Business Tax Reform Measure Aims to Spur San Francisco Recovery

Last summer, San Francisco’s city controller issued a report declaring that the city’s most viable path to a post-pandemic recovery—and its best way to avoid sliding into an economic doom loop—involved meaningful business tax reform that diversifies the tax base while paring stratospheric business taxes.

Last week, Mayor London Breed and Aaron Peskin, president of the Board of Supervisors, endorsed a business tax overhaul crafted by the city controller and the city treasurer that they intend to put forward as a ballot initiative in the November election.

The proposal calls for exempting 2,500 small businesses from the business tax by raising the threshold for the Small Business Exemption from businesses with $2M or less in total annual revenue to $5M. The plan also will lower taxes for hotels, arts, entertainment and recreation.

A city analysis estimates that 88% of the city restaurants and half of its retailers would qualify for the exemption if it is raised, according to a report in the San Francisco Chronicle.

The proposal also calls for “reduced volatility by ensuring taxes are not overconcentrated.”

It will shift the city’s main business tax away from payroll expenses and toward sales, aiming to make San Francisco less reliant on its biggest employers—the top five employers currently pay nearly a quarter of all business taxes—and sectors who have been downsizing workforces and embracing remote work.

Under the tax reform proposal, gross receipts would be calculated based on 75% of a company’s sales and 25% of its payroll based in San Francisco, instead of the current formula, which is heavily oriented to the size of the payroll.

Under the proposal, companies are expected to receive tax cuts in the short term, resulting in the city losing $50M to $60M in tax revenue by the 2026-2027 fiscal year. However, those cuts will be offset by tax increases of 4% in 2027 and 3% in 2028, resulting in flat tax revenue compared with today, barring major changes in the economy, the Chronicle reported.

If the measure doesn’t pass, business taxes will increase next year because of a different measure voters approved in 2020.

Last July, the city controller’s report noted that 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.

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.

San Francisco is facing massive budget deficits due to shortfalls in business and property tax revenue.

Masood Samereie, president of the San Francisco Council of District Merchants Association, and Laurie Thomas, executive director of the Golden Gate Restaurant Association, filed the tax reform ballot measure last week.

Their organizations, with the backing of the mayor and the president of the Board of Supervisors,  will be gathering the signatures of 10,000 registered voters needed to put the proposal on the ballot.