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San Francisco pitches tax overhaul as monster deficits loom

empty downtown scene
A report from San Francisco officials last year found that the city’s business tax penalized companies who kept their workers in San Francisco. | Source: RJ Mickelson/The Standard

The huge shift to remote work has already left a hole in San Francisco’s budget, with years of increasingly dire deficits projected. 

In response, local officials have put forward recommendations to transform San Francisco’s business taxes and align them with an economy less reliant on in-office work.  

The recommendations set the stage for a business tax reform ballot measure for the November election. 

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. The Gross Receipts Tax makes up the majority of that number, which also includes newer special taxes like the Homelessness Gross Receipts Tax, the Commercial Rents Tax and the Overpaid Executive Tax. 

Last year, a report from city budget officials found that the existing business tax structure threatened the city’s recovery. The complicated tangle of taxes and fees created negative incentives for companies during the pandemic, encouraging them to keep employees home to save money on tax bills.

people riding bike on city hall
City officials are attempting to build momentum to place a ballot measure in front of voters in November that would reform the city's complex tangle of business taxes. | Source: Morgan Ellis/The Standard

Plus, the report found that the tax base was increasingly concentrated on some of the city’s largest companies in remote work industries, leaving it vulnerable if one or more of those companies decide to depart. 

“In a world where office footprints are shrinking, we wanted to shift the tax away from something that penalizes businesses from having people physically work in the city,” said Ted Egan, the city’s chief economist.

The major recommendations put forward by the Controller’s Office and the city’s Treasurer and Tax Collector include:

  • Creating a more streamlined Gross Receipts Tax structure with fewer categories and calculations for businesses, making it easier to predict and administer 
  • Putting more emphasis on San Francisco sales versus the portion of workers in San Francisco for tax calculations to reduce the penalty for companies with workers in the city. 
  • Roll the majority of special taxes into the broader Gross Receipts Tax and reduce the concentration of the tax burden on a small set of employers.

Officials project that the recommended changes would be revenue-neutral as a whole, but would lead to some types of businesses paying more and others paying less.

Under the proposal, the 100 largest companies in San Francisco would go from paying 65% to 63% of the city’s total business taxes, while the remaining 10,800 businesses would go from paying 35% to 37% of that portion. 

Financial technology companies, for example, are projected to pay 81% less in business taxes, while biotech companies are expected to pay 68% more than they had previously.

A group of business interest groups, including the Golden Gate Restaurant Association, San Francisco Chamber of Commerce and Bay Area Council, put out a statement expressing general support for efforts to reform the city’s business tax code but saying they oppose any changes that raise taxes on any category of company.

“We strongly support reforming San Francisco’s business tax structure. However, we are unable to support a reform that does not improve our City’s overall economy. Now is the worst possible time to raise taxes on any San Francisco businesses,” the organizations said in a statement. 

Another key recommendation is meant to make it more difficult to enact new taxes by increasing the signature threshold to bring a tax measure to voters and limiting the ability for the mayor or a minority of four of the Board of Supervisors to directly place a tax proposal on the ballot. This recommendation would require a change to the city’s charter.

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%. 

“There’s a lot of things about the tax system now that adds a lot of uncertainty and concern, but don’t necessarily make the city any revenue,” Egan said. “We don’t want to discourage businesses from expanding or locating, staying in San Francisco just because the way taxes are set up.”

Around 85% of small businesses are currently exempt from Gross Receipts Taxes because they fall under $2.19 million in sales. Officials are recommending that this threshold be raised to $2.5 million and rise with inflation. 

The officials are also recommending the elimination of regulatory license fees charged by city departments like the Department of Public Health, the fire department and the Entertainment Commission. The roughly $10 million in lost revenue is expected to be offset by rate increases in the Gross Receipts Tax.