Replacing San Francisco’s tax on business payrolls with a gross receipts levy varying by business type and size would initially generate the same revenue for The City while ultimately reducing taxes to create 2,500 jobs a year, according to a new proposal.
San Francisco is the only California city with a payroll tax, which has long been criticized for discouraging hiring and stymieing the local tech industry. Yet decadelong efforts to reform the tax have gone nowhere. Now, Mayor Ed Lee and Board of Supervisors President David Chiu are hoping to put overhauling the tax on the November ballot.
A new report by the City Controller’s Office, obtained Friday by The San Francisco Examiner, is the first glimpse into what the proposed measure might look like.
The controller’s proposal would replace the payroll tax with a gross receipts tax. Businesses would be divided into four main categories, each with different tax rates varying by total revenues, according to the report.
The new tax structure would create jobs in more ways than just by removing a disincentive to hiring, the report says. Given long-term economic trends, a gross receipts tax would also serve to reduce The City’s business tax rate over time.
“The biggest reason that a switch from payroll to gross receipts would create jobs is because it would reduce the business tax in the future,” the report says. “The sum of all gross receipts in San Francisco is projected to grow 10 percent less than wages and salaries in the city over the next 20 years.”
As city officials and business leaders schedule meetings to discuss the proposal, business owners are just starting to learn about the plan. Some like what they hear.
“Taxing payroll is a problem if you want people employed,” said Dan Scherotter, owner of Palio d’Asti in the Financial District. “It’s just bad all around.”
Scherotter said the proposal makes theoretical sense, but ultimately depends on the rates.
“If it’s going to be less with gross receipts, great,” he said.
But any change in the tax structure would create winners and losers. Some businesses that aren’t paying the 1.5 percent payroll tax now would end up paying a gross receipts tax. Just 10 percent, or 8,000, of San Francisco’s registered businesses — those with payrolls in excess of $250,000 — pay the current payroll tax. The others pay a registration fee of $150 or less. This fiscal year, The City is expected to generate $390 million in business taxes.
The City would phase in the gross receipts tax, which most of California’s largest cities use.
Pressure to overhaul the tax began building last year, when several tech companies said the tax, which also applies to stock option compensation, would drive them out of town. The City took a short-term, piecemeal approach to solving that problem, exempting stock option compensation and creating a payroll tax break for new hires in the mid-Market area for Twitter’s new headquarters.