After more than a decade of conversation, San Francisco voters will finally have the opportunity this November to replace The City’s tax on employee payrolls with a tax on the revenues that businesses bring in.
The 1.5 percent tax on business payrolls in excess of $250,000 has long been maligned as a “job killer” and a disincentive for companies to do business in San Francisco, the only city in California with such a tax.
Although a simultaneous increase in business registration fees would raise an estimated $28.5 million in new revenue each year, replacement of the payroll tax with a gross-receipts tax was designed to be revenue-neutral. But since any change in where tax revenue comes from would result in winners and losers, it was a herculean political effort.
With San Francisco’s economy currently being buoyed by a high-tech boom, it was calls for immediate change from the likes of Twitter, Zynga and tech investor Ron Conway that transformed this longtime goal of some political leaders into one of The City’s political priorities in 2012. Tech leaders prefer a levy on gross receipts to a payroll tax since their businesses are much more labor-intensive than some other industries.
Pledging that it will strengthen the local economy, Mayor Ed Lee put Proposition E, the Enact Gross Receipts Tax and Phase Out Payroll Expense Act, on the ballot following an 11-0 vote by the Board of Supervisors. There is no organized opposition.
A campaign led by Conway in support of the measure had raised $624,990 as of Sept. 30. The largest donors were a troika of tech firms: Salesforce.com with $250,000, Zynga with $100,000 and Riverbed Technology at $100,000.
To reduce the tax burden on labor-intensive industries while trying not to increase any one industry’s tax burden too much, the gross-receipts tax rate would vary not only according to level of revenues but also by industry.
Rates would generally range from .075 percent to .65 percent, and businesses with less than $1 million in gross receipts would not pay the tax.
An exemption has been made for businesses headquartered in San Francisco whose operations are in other locations; such businesses would continue to pay The City’s payroll tax. If approved, the gross-receipts tax would be phased in during a five-year period beginning in 2014.
The measure also would increase current business registration fees from their current range of $25 to $500 to a new range of $75 for the smallest businesses to as much as $35,000 for business with more than $200 million a year in gross receipts.
If it passes, the new tax model is expected to roughly double the total number of businesses currently paying taxes, from 7,500 to 15,000, although the total revenue generated would remain at about $410 million. The increase in business fees would begin in 2013 and increase annually with fees based on the Consumer Price Index.
Who would pay what?
The gross-receipts tax, if adopted by voters, would replace The City’s $410 million-a-year payroll tax with a similarly sized tax on business revenues. Different industries would then pay the following rates:
Industries $0-$1M $1M-$2.5M $2.5M-$25M $25M+
Retail, wholesale, etc. 0.075% 0.100% 0.135% 0.160%
food services, etc. 0.125% 0.205% 0.370% 0.475%
entertainment, recreation, etc. 0.300% 0.325% 0.325% 0.400%
Construction 0.300% 0.350% 0.400% 0.450%
Financial services, insurance,
professional, etc. 0.400% 0.460% 0.510% 0.560%
administrative services, etc. 0.525% 0.550% 0.600% 0.650%
Real estate 0.285% 0.285% 0.300% *0.325%
*0.3% through 2020, adjusting to 0.325% in 2021 and thereafter
Source: WHAT IS THE SOURCE?