The failure of Lee's business tax plan


The Mayor’s Office and city finance officials are circulating drafts of a new business tax plan that would largely abolish the payroll tax and replace it with a levy on gross receipts.

Ben Rosenfield, the city controller, and Ted Egan, the chief economist, have been meeting with business groups and presenting what’s described in the documents they’re circulating as “one possible idea.” And there’s some very positive news about the proposal: It would greatly broaden the tax base (only about 10 percent of the city’s businesses are hit by the payroll tax) and it’s designed to be somewhat progressive: Businesses with higher gross receipts would pay a higher percentage tax.

The plan is complicated -- since some types of industries (retailers, for example) have high gross receipts compared to payroll, and some (financial services) have high payrolls compared to gross receipts, the levies are broken down into four schedules. At the lowest end, companies with comparatively large gross reciepts would pay between 0.05 percent and 0.125 percent. At the highest end, the tax would go from 0.220 to 0.535.
But there’s one central -- and simple -- element of the proposal: At this point, it’s entirely revenue neutral. In fact, finance officials say, over time the total tax burden paid by local businesses would go down, since payroll tends to rise slightly faster than gross receipts.

That, sources say, is something the mayor has made clear he doesn’t want to budge on. He’s not willing to accept a plan that raises the total amount of money the city gets from business taxes.

Which puts him in synch with what some business groups want: “The business community thinks this should be revenue-neutral,” Scott Hauge, who runs Small Business California, told me.

But in a city that faces a large structural budget deficit, some supervisors have other ideas. “I want to look at new revenue possibilities,” Sup. John Avalos said.

And even the current proposals would let banks, which are exempt from local business taxes, escape without paying anything.
In reality, the proposals are less then revenue-neutral. Rosenfield and Egan project that the new tax system would lead to the creation of 2,500 jobs a year -- mostly because businesses over time would be paying lower taxes.

Hague told me that he’s not sure exactly how business leaders feel about this. “We don’t know yet how it will affect people,” he noted. But some political leaders have been clamoring for years for the elimination of the payroll tax, which, by taxing employment, appears to be a damper on job growth.

That’s actually a myth. The payroll tax is so minor that it can’t possibly influence any individual hiring decision. It’s true that if city business taxes in general are reduced, companies will have more money -- and some might spend that on new hiring. But San Francisco, like most major cities, has to have some kind of business tax -- and I can already hear some downtown types complaining that a gross receipts tax “punishes growth and success.”

This proposal is a long way from what Sup. David Chiu suggested a year ago. His plan would have included a commercial rent tax -- ensuring that financial institutions that get away with paying nothing would have to contribute like other businesses. Like most local taxes, it wasn’t perfect -- state law bars cities from imposing corporate income taxes and limits what else municipalities can do -- but together with a reworked gross receipts tax, it was projected to bring $28 million more dollars into the city treasury -- without any job loss.

But the Chamber of Commerce and crew fought bitterly against that idea, and Chiu withdrew it.

At this point, Chiu said, he’s working with the mayor and trying to get the business community to accept the idea of a change in the tax structure. But this is a rare opportunity to do two things -- to make the local tax system more fair, and to raise taxes on the biggest companies to bring additional revenue into the city.

The plan will probably have to go to the ballot anyway, so why not do it right?


Seriously. That's his answer to everything - more money.

Posted by Guest on Mar. 05, 2012 @ 5:30 pm

Presumably we're making the change from payroll to something else because payroll wasn't fair or had some other unintended consequence. Shouldn't we make the complicated change first and then play around with the rates if we want more money?

Or does every change need to be a way to IMMEDIATELY suck more money from local businesses?

Posted by Guest on Mar. 05, 2012 @ 6:42 pm

from increasing tax rates. You can do either one without the other.

Of course Avalos and Redmond want to increase taxes. They're a broken record. But Lee won a landslide victory on a pro-business, pro-jobs mandate. If Lee was just going to implement Avalos's ideas, then what would that say? That elections are pointless?

I'm not convinced about a GRT - it seems too easy to hike - the argument would be "but it's only a 0.001% increase!". What I'd really like to see is lower taxes on business to encourage jobs in SF - as it is we have to offer cuts in payroll tax to persuade high-value employers like Twitter to stay as it is.

Posted by Guest on Mar. 06, 2012 @ 12:14 pm

The author is absolutely correct that most SF executives don't know there is payroll tax. (Or at least most didn't know about the tax 10 years ago when they were presented with some simple tax planning ideas to reduce their tax liaiblity). And the SF payroll tax is way down their list of business considerations and potential expenses that affect a SF location decision compared to the much more important facttors such as a skilled and trained labor force, rent cost, labor costs, space availability, transportation access, proximity to suppliers and customers, etc. Any CEO who spends more than 5 seconds thinking about the miniscule SF business tax should be fired for lack of priority and judgment.

A proposed tax that raises a modest amount of additional tax revenue in these very difficult times for governments is a moderst request (and compensates for the fact that we never quite know how much less money the new tax may raise compared to the old tax). Let's hope the mayor and supervisiors work to adjust the tax rates. Even at at the highest tax level the propsoed tax is only 1/2 of a penny! And at it's lowest level it's a mere 1/10 of a penny.

The proposed tax rates are laughable really, compared to the 35% federal tax, 7.5% employer payroll tax, 9% state tax, and the 10% sales tax that sometimes applies. If I understand the numbers correctly, on a $1,000 sale for legal or advertising services, or even a large grocery bill -- we're talking about 50 CENTS at the lowest tax levels or $5.35 at the highest. It's so absurdly low that it's a joke of a tax that I'm sure most big business leaders are laughing about how much control they have over the local government.

But the best aspect of the mayor's proposal is that it does make a lot more sense to tax gross receipts than payroll. If he thinks this is the only way to get the Chamber, SPUR and BOMA to go along with the change, then it's worth the revenue neutrality since those groups have limitless resources to kill most tax proposals with a well-funded campaign even in a major turn-out election such as November 2012.

While it can be fairly easy for some companies to shift payroll expenses to non-SF locations to reduce their payroll tax expense (even SF based law and accounting firms pay a small fraction of expected payroll tax since so many hours of their SF based workers are allocated "outside SF"), it's very difficult to avoid a gross receipts tax since either the sales transaction took place in SF or it didn't. Fairly simple allocation methods can be used to split the revenue when it was partially earned inside and outside SF.

A gross receipts tax allows out-of-city companies who profit from the very lucrative SF market to pay some of the business tax rather than rely - as currently - on only the companies that actually employ people in SF. And since many export transactions (sales to customers outside SF) are taxed less or not al all (we'd have to read the proposed legislation to know for sure), a gross receipts tax benefits local businesses more than a payroll tax.

The dropping of the rent tax is most unfortunate, however, since that's the best tax of all: the land can't leave the city and a tax on rents has no affect on the final rent cost to a tenant since landlords already charge as much for the space as they can get from a tenant regardless of the landlord's costs. I wonder if a commercial rent tax is really excluded from the tax base or maybe it's burried in one of the tax categories.

An annual rent tax would make sense for funding a sustainable affordable housing fund that is also on the mayor's agenda. The tax make's sense from an equity perspective too. Commercial property owners benefit from a highly paid work force, which translates into high rents. But the high-priced labor has a negative effect on current SF residents who are either displaced or charged higher rent caused by the additional high-paid workers drawn to the city. A commercial rent tax that recycles some of the rent into afforable and workforce housing programs like Habitat for Humanity alleviates some of the negative effects of the high rents and displacement.

One aspect about this administation that is troubling is this notion that SF has be to "sold" to employers. Nothing could be further from the truth. SF has far more to offer in terms of labor quality and experience, access to large pools of investment capital, transportation infrastructure, and scenic beauty than 99.9% of ALL other cities in the US or even the world. Since San Francisco already offers tremendous benefits to SF employers there's no reason for the mayor to sell the city as a cheap whore just to get some attention (and presumably campaign support) from wealthy business suitors. The mayor shouldn't be demeaning the city by pandering to the wealthiest landlords and biggest businesses since the economic game is already so heavily stacked in their favor.

Posted by Guest on Mar. 05, 2012 @ 9:47 pm

both businesses and tenants. We need to be very sensitive to any tax measure that is inflationary in what is already a very expensive city.

Your point about SF being "attractive" is illusory. The most successful Bay Area companies are very careful to position themselves in other Counties, while the biggest SF-based employers, BofA and WellsFargo, have upped and left for more business-friendly cities (Charlotte, NC and Minneapolis, MN).

As we saw with Twitter, successful companies can call the shots. We need them more than they need us, and there are three other Counties within ten miles.

Posted by Guest on Mar. 06, 2012 @ 12:19 pm


Why don't you research how much Muni's budget has increased over the last ten years, and then tell us how much the service has improved over the same time period.

The beneficiaries of "new revenue" (i.e. tax increases) are City employees not the residents of San Francisco.

Not one dime.

Posted by Guest on Mar. 05, 2012 @ 11:07 pm

The business tax settlement that eliminated the gross receipts tax in 2001 was a tax cut. The City has lost $80m or so per year due to that settlement. Any new tax structure should restore revenues to what they were 10 years ago adjusted for inflation. That would be a tax restoration not a tax increase.

Posted by marcos on Mar. 06, 2012 @ 10:54 am

What's important is whether the Mayor feels that his recent election win is a mandate to hike taxes on jobs and business. Lee obviously feels not, and the Avalos tax hike plan was roundly rejected by the voters.

Lee's approach here is prudent. Changing the method of the taxes should be revenue-neutral. If the voters then elect a pro-tax Mayor, then he will have a mandate for higher taxes. Right now that doesn't exist.

Posted by Guest on Mar. 06, 2012 @ 12:32 pm
Posted by Guest on Mar. 06, 2012 @ 2:18 pm

significant mandate from the voters. He dismisses that the voters clearly wanted a pro-business, pro-jobs, low-tax city government.

In Tim's mind, since the election didn't give him what he wanted, then he simply ignores the election results and acts like Avalos was Mayor which, of course, he was never close to being.

Posted by Guest on Mar. 06, 2012 @ 2:43 pm

The people who won the case still need to pay up?

Thats just weird reasoning.


• The legal challenge. From 1970 until Spring 2001 San Francisco maintained an alternative-measure business tax, consisting of a 1.5% payroll tax and a varying rate gross receipts tax. Every company doing business within the city calculated its tax payment under each system and paid whichever amount was higher.

But in 1999, General Motors and Eastman Kodak brought suit against Los Angeles , which had a similar alternative-measure tax, claiming it was unconstitutional; in March 2000 the California State Courts concurred. In essence, it was decided that levying the gross receipts and payroll taxes against different firms simultaneously was unconstitutional. One or the other would be allowed, but it is illegal to do both.

Some of the same companies sued San Francisco , and the city decided to settle. The San Francisco Board of Supervisors passed a measure to eliminate the gross receipts tax, paid by 18% of the city's businesses, effective May 25, 2001 . Subsequent efforts to more carefully revamp the business tax system-culminating in Proposition I on the November 2000 ballot, which would have enacted a retroactive payroll tax-have failed.

Posted by Guest on Mar. 06, 2012 @ 4:36 pm
Posted by Guest on Mar. 06, 2012 @ 5:01 pm

I realize Lee won the election. That doesn't change my opinion about business taxes. And I don't think Lee is the "no-new-taxes-ever" type that you're portraying him as. He's smarter than that, and I think we can convince him that some new revenue is necessary for the city.

Posted by tim on Mar. 06, 2012 @ 3:20 pm

a high-tax, anti-business candidiate (Avalos) and Lee, who clearly stood on a pro-business platform, made their decision.

So are you saying that Lee should ignore his mandate and instead implement an Avalos policy?

The issue of what type of business tax to have is quite distinct from what level of revenue we should raise. This issue is about the former.

While if you think you can persuade voters to be taxed more so that city workers don't have to give up any of their bloated pension and hgealth entitlements, then make that case to all of us voters who have far worse benefits.

Posted by Guest on Mar. 06, 2012 @ 5:05 pm

I am so glad that I am based in Pennsylvania. I heard about Harborcompliance to help me understand the legalities of starting my own business, including tax and tax registration. I first heard about it from a friend of mine who, like me, was starting his own business. Harborcompliance was able to help him in forming his personal business helped him with the various filings with government agencies. The organization did a very good job that he was able to start his business on a smooth footing.

Posted by Fred Dahlberg on Jan. 21, 2013 @ 10:45 pm

The issue I have with proposals like this one are the loopholes that will exist to "help" large business entities escape the tax. The plan is already going to exclude banks from the equation...really?

Posted by Anita Clark on Mar. 06, 2013 @ 6:32 pm