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Politics & Policy

San Francisco voters approve business-friendly overhaul of city tax system

A storefront with signs reading "STORE CLOSING" and "AVAILABLE" with contact details. One person walks past, while another enters. Decorations are visible inside.
Prop. M overhauls the city’s entire business tax system. | Source: Morgan Ellis/The Standard

Business taxes — though complex and often opaque — make up the second-largest source of revenue for San Francisco. 

Voters approved Prop. M, a measure on the November ballot meant to overhaul the city’s business taxes in a way to create a fairer and more resilient system better suited to an era of remote work. 

The city’s tax burden has been progressively focused on a smaller portion of companies. A city report found San Francisco’s five largest companies pay around a quarter of its business taxes. If one or more of these companies leave, the fear is that it will blow a major hole in the city’s ability to fund vital services.

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Prop. M, introduced and endorsed by an alliance of small business owners, large corporations, and politicians, cuts taxes on a handful of the city’s largest employers and increases the number of small businesses exempt from business taxes and certain licensing fees. It also overrides scheduled tax increases for small businesses amid what is still an uneven economic recovery for the city. 

But they can’t all be winners. As the tax base is broadened, many midsize companies in the city will likely pay more as the city looks to make up the difference in tax revenue from the changes. 

The current system heavily weighs the number of employees working in San Francisco to calculate what a company owes in business taxes, creating a disincentive to bring employees back into the office and has led to the slower recovery of downtown. Prop. M’s adjustments are meant to change that formula.

The measure’s passage makes major changes to how business taxes are calculated for individual companies, shifting from a tax formula focused on payroll to “gross receipts” or sales in San Francisco. The number of tax categories would shrink and the arduous process by which a business calculates its local taxes would theoretically be made simpler. 

In part because of the wide-scale agreement on the need to stabilize the city’s tax base amid years of projected deficits, there was near ubiquity in support of the measure.

All major mayoral candidates stated their support, as well as nearly the city’s entire political apparatus, business interest groups that represent hotels and restaurants, and large corporations like Google and Airbnb. Labor unions were involved in negotiations on the measure and have chosen not to actively oppose it.

One more technicality still exists. A conflict between Prop. M and Prop. L, which aims to help fund Muni services through taxes on rideshare and robotaxi companies.

Prop. M’s language essentially includes a poison pill, meaning if both measures get a majority vote but Prop. M gets a greater number of votes, Prop. L will be negated. At last count, Prop. M leads by about 30,000 votes.