Among the most monumental political challenges expected in 2012 is the overhaul of San Francisco’s business tax, an effort that has eluded politicians for more than a decade.
Changing the tax’s structure is difficult, since it means businesses that aren’t hit with The City’s payroll tax will have to start paying levies if the system reverts to a gross receipts tax, which is the most likely alternative.
“The time has come, after literally years of talk, to reform the business tax,” Mayor Ed Lee said during a Dec. 13 Q-and-A session before the Board of Supervisors, reaffirming his commitment. It would take a ballot measure, which is in the works for November.
This year, the Board of Supervisors and Lee reacted quickly to specific companies’ concerns by tweaking the business tax law. They adopted a payroll tax break for new hires for the mid-Market Street area to keep Twitter from leaving town, and a stock option tax break for Zynga was created.
“The very fact that we needed to talk about that legislation and that we also supported amendments to exempt stock options from taxation shows that we have a more systemic problem,” Lee said, adding that the business tax “does not generate stable revenue flows and it creates reverse incentives for growth.”
The City had even budgeted $100,000 at the start of the fiscal year to hire an analyst to come up with proposals.
Supervisor David Chiu, the board president, is committed to changing the business tax, a conversation he began with former Mayor Gavin Newsom.
“We need to do this to create jobs,” Chiu said. “We can’t be the only city in California that directly taxes job creation.”
But changing the tax is a tall order, as it impacts numerous business segments and will require support from union labor leaders who advocate increases in city revenue.
“We need to come together as a city and figure out a better way,” Lee said of the tax.
San Francisco is the only city in California that applies a 1.5 percent payroll tax on businesses. It generates about $400 million a year through the levy, which is only applied to companies with payrolls in excess of $250,000. The likely alternative is a tax on gross receipts — what businesses earn — and rates would fluctuate by industry.
In San Francisco, there are about 80,000 businesses, all of which pay an annual license fee of between $25 and $500. About 6,000 are required to pay the 1.5 percent payroll tax.
“It’s going to be a tough policy conversation,” Lee said.
San Francisco generates hundreds of millions of dollars in revenue annually through its business tax.
$390.6M Amount city will collect in business tax in fiscal year 2011-12
1.5% Payroll tax rate charged to businesses with payrolls of at least $250,000
6,000 Estimated number of businesses hit with payroll tax
80,000 Estimated number of businesses in San Francisco
Sources: City Controller’s Office, Treasurer’s Office