Remote work prompts proposed tax changes
San Francisco officials recommended sweeping changes to the city’s tax system on Monday in an effort to mitigate losses from remote work, simplify the code and help small businesses.
Proposals include shifting to taxes based more heavily on sales rather than the number of a company’s employees physically based in San Francisco, cutting fees on small businesses and office rents, and consolidating multiple taxes.
Most of the changes would require voter approval and could form the basis for a November ballot measure this year. The recommendations are expected to result in no changes to overall tax revenue, but policymakers could seek a package at the ballot that yields more or less tax revenue.
After a decade of boom, the city is now grappling with an annual budget deficit that could reach $1 billion by 2028, and Mayor London Breed has ordered multiple rounds of cuts. Much of the pain is tied to remote work and the city’s dependence on tax revenue from big companies. Work from home cost the city $484 million in 2021, according to a previous analysis. Breed is also facing reelection this year as businesses large and small complain about public safety, street conditions, difficult permitting and high taxes.
The proposals from outgoing Controller Ben Rosenfield, Treasurer José Cisneros and Chief Economist Ted Egan were developed after more than 30 group meetings over five months with local businesses to generate the ideas.
Officials hope the changes make the tax code simpler and reduce conflicts with taxpayers, while lessening the burden on small businesses and making the city more attractive for job creation as it struggles to come back from the pandemic.
“Simplifying our business tax structure helps businesses and the City,” said Cisneros in a statement. “These reforms create a tax structure that is clear, fair, and promotes economic growth.”
To mitigate the effects of remote work, a proposal calls for the gross receipts tax to be calculated using 75% of sales in the city and 25% of payroll apportionment, or the number of workers physically in the city, for all industries aside from real estate. Currently, non-real estate industries calculate gross receipts using either 50% or 100% of payroll, meaning the city loses out more when workers go remote.
Officials also hope the change means companies won’t be penalized for creating jobs in the city, continuing an earlier effort that resulted in voters abolishing the payroll tax in 2020. However, the shift to taxing sales more would lead to retailers bearing the highest tax increases, the report notes, as many are closing in downtown.
Business groups said they strongly support reforming the tax code but oppose any tax increases.
“Now is the worst possible time to raise taxes on any San Francisco businesses. We need reforms that lower taxes on small businesses and major employers alike to help revive our economy, revitalize downtown, and grow neighborhood small businesses for the long term,” said leaders of the San Francisco Chamber of Commerce, Golden Gate Restaurant Association, Bay Area Council, Advance SF, and Building Owners and Managers Association of San Francisco in a joint statement.
Proposals include a 90% rate reduction for the Overpaid Executive Tax, a voter-approved tax that affects large companies with top executives that make 100 times more than the average employee. The tax generated $206 million over 18 months, but cutting it would help city goals of reducing volatility and dependence on major companies. The tax is volatile in part because it’s subject to swings in the stock market.
Other changes include cutting the commercial rent tax rate by 25% and merging the homelessness gross receipts tax — another tax that only hits large companies — with the general gross receipts tax, while preserving funding for homelessness services. The cuts would be offset by increases in the overall gross receipts tax.
In another change, the city would cut $10 million in annual license fees mostly paid by small businesses, including restaurants and bars, lessening the burden as many operators struggle during a slow recovery.
“Tax reform is going to be a necessary part of navigating the economic and financial realities of the City’s post-pandemic recovery,” Rosenfield said in a statement.
Under all the changes, the nearly 11,000 small businesses making less than $25 million in annual gross receipts would see a 4%, or overall $10.4 million, annual decrease in tax liability. Midsize companies making $25 million-$100 million would see a 5% liability increase, or $14.1 million in total. The city’s 173 biggest companies with over $100 million in gross receipts would see almost no change in liability.
“We’ve long known regaining our competitive edge requires changes to how we structure our taxes. I look forward to working with everyone in City Hall as well as our labor partners and business community on how we move forward from here with reforms that will be in the best interest of San Francisco, and the people who live here,” Breed said in a statement.
Another recommended change would make it harder for future tax increases to get on the ballot, by increasing the voter signature threshold required and eliminating the ability of the mayor or a minority of the Board of Supervisors to place tax measures on the ballot. The report notes that other California cities have both higher signature thresholds and don’t allow mayors or board minorities to place measures on the ballot.
Any changes will “need to balance so many additional post-pandemic challenges, from declining revenue to stabilizing our struggling small businesses and attracting new jobs to San Francisco,” said Board of Supervisors President Aaron Peskin in a statement. “I hope that policy makers can build on this work and negotiate a fair compromise reform package that — while no one will love — most taxpayers can agree will help stabilize San Francisco’s economy.”