San Francisco Taxes

San Francisco Mayor Launches Tax Reform Effort After Study Highlights Tax Climate Problems

Bay Bridge SF

San Francisco Mayor London Breed announced July 12 that she is launching a campaign to place an initiative on the November 2024 ballot to reform San Francisco’s business taxes, with an eye toward improving the tax climate to attract and retain employers.

The announcement was made after city officials reported that San Francisco’s business tax revenue “increasingly comes from a smaller handful of large taxpayers” and additional taxes would add to the city’s financial risk because “these businesses could potentially reap substantial tax savings” by moving to other cities in the Bay Area.

“Our work to revitalize Downtown, strengthen our economy, and remain an economic leader requires us to change how we structure our taxes,” Breed said in a statement. “We can set our business taxes to both deliver the important services we all rely on while also making us more competitive to attract and retain business. This will require partnership between City Hall, the business community, and stakeholders across the City – and it’s critical we start this process now.”

Supervisors Aaron Peskin and Rafael Mandelman also voiced their support for reform.

The July 12 report found that by 2022, based on tax filings received as of May 8, “the largest five payers, comprising 0.04 percent of taxpaying businesses, contributed 24 percent of all business tax revenue” and “the largest 100, who make up 0.7 percent of taxpaying businesses, owed 58 percent of the total.”

The report also estimated what a large technology company in the Information sector would pay in local business taxes in San Francisco and the eight other Bay Area cities with significant employment in that sector.

“The results of that analysis indicate that the business would pay at least 20 times more in San Francisco than in each of the other locations, except for Oakland, where the margin is narrower,” the report states. The difference is actually even higher than this, as the analysis did not consider San Francisco’s “Overpaid Executive Tax,” which no other city in California imposes.

Treasurer José Cisneros, Controller Ben Rosenfield, and Chief Economist Ted Egan prepared the study at the request of Supervisor Rafael Mandelman, who last year directed them to study how the increase in remote work affects business taxes.

“During the 2010s, the rapid growth of the tech industry, and the entire city economy, fueled growth in City tax revenues, particularly from business taxes,” the study states. “The City, which started the decade with the highest business tax burden of any city in California, further raised that burden with several rate increases and new taxes. None of these changes stopped San Francisco from being one of the fastest growing cities in the country during the 2010s, although it did deepen three sources of risk in the City’s finances.”

The three risks outlined in the report:

  • The increase in the number of employees working remotely has allowed businesses to reduce office space in San Francisco.
  • The city is “increasingly reliant on taxes on the leasing and sale of commercial office properties” while “remote work has led to a reduced volume of transaction of these properties, and there is some evidence of a marked reduction in property values.”
  • “Finally, both structural changes in the city’s economy, and policy choices to make the tax system more progressive, has had the effect of raising overall revenue volatility by concentrating revenue in a few payers. This runs counter to a longstanding City policy goal of minimizing volatility by broadening the tax base.”

The study acknowledges that economic growth is the best source of new revenue, as CalTax and other taxpayers’ advocates have stressed for years.

“[S]trong economic growth has led to substantial growth in City tax revenue,” the report states. “Per capita tax revenue in San Francisco has more than doubled in twenty years, after adjusting for inflation. The City received $3,003 in tax per resident in fiscal year 2002-03 (in 2022 dollars). In the most recent fiscal year 2021-22, tax revenue per resident was $6,838.”

San Francisco voters have approved several tax increases in recent years: In 2008 and 2010, two increases to the real property transfer tax were approved; in 2012, voters approved a business gross receipts tax; in 2016, another increase to the transfer tax was approved; in 2018, voters approved a tax on commercial rents and a gross receipts tax on large businesses; in 2019, a “Transportation Congestion Mitigation Tax” was approved; and in 2020, voters approved an additional increase to the gross receipts tax, an additional transfer tax increase, and the “Overpaid Executives Tax.”

The mayor and Board of Supervisors will direct the city treasurer and controller to seek feedback from the business community regarding specific recommendations, which will be placed into a final report by the end of the year.

(CalTax: We applaud this effort. CalTax has had positive initial discussions with the city, and we look forward to partnering with city leaders as they work to make the city more competitive.)