High taxes may not deter S.F. businesses
San Francisco has the highest business tax rates for large companies in the Bay Area. But it is unclear how much that is affecting the city’s ongoing uphill battle to recover the officedriven economic vitality plucked away by the pandemic.
A recent report by the Bay Area Council Economic Institute compared the tax burdens of three hypothetical companies with between 75 and 1,000 employees and high taxable gross receipts in 15 cities, big and small, across the region.
The Bay Area Council is a public-policy and advocacy organization whose members include some of the largest employers in the Bay Area, including Wells Fargo, Google, Salesforce and others.
Making that comparison is no easy feat since each city taxes companies differently based on their size, industry and revenue. And some cities, like San Francisco, use a progressive structure that increases a company’s tax bill the larger its gross receipts, or total amount they take in, are.
Perhaps unsurprisingly, San Francisco was at the top of the chart in all three instances, far outstripping the second- and third-ranked cities, Oakland and Berkeley — especially when factoring in San Francisco’s Proposition C anti-homelessness tax on large companies and wealthy individuals that passed in 2018.
The Bay Area Council report reasoned that high taxes in San Francisco compared to other nearby cities could contribute to pushing the types of companies it used as examples — companies with $100 million, $500 million and $750 million in taxable gross receipts — out of the city.
For example, in the report, a hypothetical financial technology payment processing company with 1,000 employees and $500 million taxable gross receipts would pay close to $7 million in business taxes annually, including $2.7 million in Prop. C taxes, while the same company would pay slightly less than $70,000 in San Jose.
The report did note that “while it is impossible to pinpoint a single determining factor in relocations and other corporate real estate decisions, we can analyze business taxes across the region to better understand the cost-benefit calculations that businesses are making as they determine how to locate their real estate and labor force needs.”
But Jeff Bellisario, one of the authors of the report and the executive director of the institute, said companies with revenue of that size are “much more likely to be willing to absorb these figures.”
But the current cloudy economic forecast, and continuing hold of remote work, have companies examining their line items more closely, particularly with thousands of layoffs roiling the Bay Area in recent months, he said.
“Tax changes are not going to be a silver bullet, but could be one of a menu of things that contribute to downtown recovery,” Bellisario said.
The city’s decision to give Twitter a break on its business taxes a decade ago helped entice the social media company to the Mid-Market area. More recently, Mayor London Breed has rolled out a plan to give companies that move to San Francisco an annual discount of up to $1 million off their gross receipts taxes for three years while delaying other new business taxes passed in 2020.
Bellisario said adjusting business taxes is “one of the only levers that a city really has to pull as they think about their own attractiveness with business retention.”
A Chronicle analysis of fiscal year 2021 tax data also showed that property taxes made up the majority or the plurality of the revenue for San Francisco, Oakland, Berkeley and San Jose.
Financial services companies that process transactions, like payments company Block, formerly Square, have complained about being disproportionately affected by taxes like Prop C. Block CEO Jack Dorsey took to Twitter, which he also founded, to point out how his company and others in the financial technology industry could be unfairly impacted by the tax after it was passed.
Block relocated across the bay to Oakland in 2022. Another large payments company, Stripe, moved from San Francisco to South San Francisco in 2019.
But comparing San Francisco, which is both a city and county, to, say, San Jose, where business taxes were shown to be much lower in the report, is not necessarily a one-toone comparison, said, Sujata Srivastava, the San Francisco director of public-policy nonprofit SPUR.
“San Francisco as a net importer of jobs has a lot of services it provides to the daytime population that a lot of these other places don’t,” she said. San Jose’s economic base is different, and traditionally its ability to attract and retain businesses has been less magnetic than its neighbor to the north, which partly explains its hands-off approach to business taxes, Srivastava added.
Comparing San Francisco to Berkeley, for example, also yields confusing results since that city’s largest employer is a staterun university that does not pay taxes, Srivastava said.
San Francisco being a county as well as a city means it is also responsible for a broader range of services — such as homelessness, transportation and health services — than a larger city, like San Jose, Srivastava said, something Bellisario also pointed out.
“Many companies don’t make their primary location decision based on taxes,” especially larger ones like those covered in the Bay Area Council report, Srivastava said. Oftentimes, much larger expenses like salaries and real estate are more likely to influence a business’ calculus about where to set foot, or not, she added.
Those decisions are also highly influenced by where potential employees are located, and factors like transportation access, “Which San Francisco beats all of these places in,” she said.
The higher taxes businesses pay to be in the City by the Bay are also not new.
“San Francisco has long had the highest business tax burden of any city in California,” San Francisco’s Chief Economist Ted Egan said in an email.
Of course, what is new is the high office-vacancy rates in downtown office buildings which threaten to have a long-term effect on everything from transit to the price of a Financial District sandwich.
Downtown San Francisco has lost around 150,000 daily office workers since the pandemic began because of factors like remote work and more people shopping online, a report from the city’s Budget and Legislative Analyst’s Office found.
But that doesn’t just mean companies will abandon San Francisco for a lower tax jurisdiction such as Pleasanton or Fremont, Srivastava said. Instead, she said it will be one factor among many that may speed up trends underway since before the pandemic — like workers moving farther from city centers for more affordable housing.
Companies are likely to continue to “decentralize their operations a little bit,” she said. One example is the electric-car maker Tesla, which announced it was moving its headquarters from Palo Alto to Texas, only to name Palo Alto its second headquarters just this month, calling the city its global engineering hub.
Pandemic or not, the question of taxation’s ability to nudge companies into or out of a given city is not a new one. A 2004 report authored by SPUR found that “taxes play a role in economic development, but it is not clear how important a role,” adding that taxes matter to a business usually after numerous other factors have been considered.