San Francisco’s plan to break the doom loop? Fix business taxes

It’s a rare cause that can align San Francisco’s biggest private sector employers with its nonprofits and labor unions, or bring together political rivals like Mayor London Breed and Supervisor Aaron Peskin, who is challenging her reelection bid. 

The urgent need to reform San Francisco’s perverse business tax formula is just such a cause—and, after two years of effort, a proposal to fix it could be going to voters for approval in November.

Modifying the gross receipts tax to focus on a company’s sales instead of its on-site headcount, the proposal would slash taxes for many small businesses while making it more attractive for large ones to keep their workers in town.

City officials acknowledged to The Standard that the plan, which underwent an extensive review by former City Controller Ben Rosenfield and the Treasurer and Tax Collector’s Office, will likely bring in less revenue for the city in the first few years while making San Francisco’s budget less dependent long-term on a handful of companies. (Hardened policy wonks can delve into the specific language of the plan here.)

“We’re trying to make the city more resilient or less vulnerable to one or two big actors [leaving town],” said Supervisor Rafael Mandelman, who last summer wrote a letter of inquiry that put city officials to task on reforming the tax code. 

A coalition of business people, nonprofits and union representatives is expected to submit the measure this week to the Department of Elections, giving the plan a 50% threshold for passage, lower than if the proposal was put on the ballot by elected officials. This group will help fund the signature-gathering effort to get the measure to qualify for the ballot. 

The measure is meant to be revenue neutral “over time,” according to two sources with knowledge of the plan. That means the reforms will initially lead to business tax revenue declines before they climb in successive years.

Two sources said the business tax deficit in its first year compared to the status quo would be nearly $100 million. The tax plan is slated to raise business tax rates across the board by 4% in 2027 and 3% in 2028. 

San Francisco’s existing gross receipts tax heavily weighs the portion of a company’s workforce located in the city, effectively deterring employers from bringing workers back to the office or even incentivizing them to relocate offices to other cities. 

The proposed measure shifts the way that local taxes are calculated for most employers, with 75% based on a company’s sales in San Francisco and 25% based on where workers are located. 

For example, a company like Walmart, which has little active presence in the city but sells products to San Franciscans, would be subject to higher taxes. Although the largest employers in the city will see a marginal tax decrease, many large corporations just under that highest tier are likely to see marginal increases. 

The proposal cuts in half, from 14 to seven, the number of categories used to determine a company’s tax rate. A new category dubbed Advanced Services will cover the bulk of knowledge work work; other categories include hospitality, financial services and real estate.

Construction was the last category to be added in negotiations with builders arguing that a tax hike would raise building costs that have hampered development in the city. 

For small businesses, the measure would amount to a widespread tax cut. Around 85% of San Francisco companies are currently exempt from gross receipts taxes because they fall under $2.19 million in sales. The new proposal would raise this threshold to $5 million, massively increasing the number of businesses exempt from the tax. 

The effort dates back to 2022 and has gathered momentum over the past year. Last July, the Controller’s Office released a report that found a hypothetical tech company with $30 billion in sales and 10,000 local employees in San Francisco would pay 20 times more in local business taxes than if it were located in Mountain View. That tax differential rose to more than 200 times in San Francisco compared with San Jose and 1,300 times more than in Sunnyvale. 

“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,” the report stated.

San Francisco’s array of business taxes is the city’s second-largest source of revenue after property taxes, making up some $1.4 billion of revenue in 2022. Ironically, the current gross receipts tax structure was itself approved by voters via a 2012 ballot measure.

Sources said that Rosenfield, who announced he was retiring from his position as City Controller in February, continued to remain on payroll and work behind the scenes on the ballot measure until Friday. Other stakeholders who’ve had a seat at the table during negotiations include major San Francisco employers such as Google, Salesforce, Airbnb and Uber. 

Labor unions—thought to be a major stumbling block for the measure’s political success—have been involved in talks, and they will not actively oppose its passage, sources said. Last month, several public sector unions signed tentative agreements with the city that include wage increases. 

“As San Franciscans, now is the time to work together and put the city first,” said Alex Bastian, the president and CEO of the Hotel Council of San Francisco. “This unprecedented effort will send the right signal to businesses worldwide that our city is heading in the right direction and is still a great investment.”

One key policy idea that will not be addressed is raising the signature threshold necessary to place new taxes on the ballot. Business groups have long complained that it is far too easy to enact new taxes in San Francisco.

As a point of comparison, Oakland requires the signatures of 10% of the city’s registered voters to place a citizen-initiated tax measure on the ballot. In San Francisco, the number is 2%. Altering those requirements would necessitate a change to the city charter through an additional ballot measure.