The fractious political class of San Francisco has reached a surprising consensus, for once. The topic is business. The agreement: It’s super bleak out there.
The city’s budget has a billion-dollar hole in it; downtown office occupancy is about half of 2019 levels, the worst among major U.S. cities; and large employers—including Google, the great golden goose of the 21st century—are fleeing the city center.
The city’s solution is a much-ballyhooed proposal to reform its tax code, released last week. The grand bargain, which would go before voters this November, has something for everyone around the table. The richest companies, some of which would see lower taxes, would have more predictability about what they owe. Small businesses would overwhelmingly pay no taxes. And the city would reduce the risk of relying on a few big corporations to foot its bills.
As an added bonus for businesses, tax increases set to take effect next year would be pushed further into the future. The proposal—supported by everyone from Mayor London Breed and Board of Supervisors President Aaron Peskin to big- and small-business groups and organized labor—even includes some limited tax cuts, something that the business community has been pining for.
The headline here is that the city has finally accepted that it has a problem. Think of it as a municipal version of the Kübler-Ross stages of grief, with the City Family having moved fully past denial and into the bargaining phase. (As if more convincing were needed, news broke last week that Google, an active participant in the tax-code dealmaking, is abandoning an office building on the city’s downtown waterfront.)
But in spite of the city taking a laudable first step, all is not rosy here. In actuality, the proposal is a contorted mess, one that gets fuzzier the longer you stare at it. What the city came up with after months of negotiations is complicated, opaque and not nearly as radical as its supporters would have you believe. It’s less reconstructive surgery than a restorative spa treatment—a tweak that is not designed to stay tweaked.
I spent the past week trying to unpack the proposal, including poring over the city’s summary of the deal and talking to many of the negotiators who sat at the table. Publicly, they say all the right things. Privately, nobody was enthusiastic.
It’s an incremental improvement over the status quo, they said in hushed tones, damning the deal with faint praise. I observed to one participant that the bargain felt like a child moving peas from one end of the plate to the other. “Yeah, I’ve heard it likened to rearranging deck chairs on the Titanic,” this policy wonk responded. “I see it more charitably as providing some additional lifeboats.”
To grasp the incrementalism in this very San Francisco version of “tax reform,” consider some of the proposal’s key elements, many of which were left out of the official explanations:
• The corporate tax cut is tiny. In all, the cuts would have eliminated $42.9 million in taxes in 2022 out of the total of nearly $1.4 billion levied on business that year. The city believes that figure will jump to between $50 million and $60 million annually for the three years after the proposal is enacted. If the goal were to convince businesses not to leave SF, this alone isn’t going to do the trick. Given the taxes they already pay and the inflationary state of everything they buy, companies don’t feel like they’re getting bang for their buck. And they have plenty of alternatives—whether that’s moving to another city or just going fully remote. If companies don’t find the environment in San Francisco to their liking, they still have incentives to leave.
• Concentration remains a risk. The city says the top five corporate taxpayers in San Francisco currently pay about 29% of its business taxes. This is a problem because the departure of any one giant corporation could hit the city’s budget hard. To wean the city off of its biggest taxpayers, various cuts in the package will slim down the above figure to 23%. This is progress, but it hardly removes the threat of abandonment. (It’s anyone’s guess, by the way, precisely who the Big Five are because the city’s controller and treasurer are prohibited by law from saying so. Reasonable guesses include Salesforce, Visa, Uber, PG&E, Airbnb and a few others.)
• The cuts are temporary and can be reversed. The plan would delay tax increases that had been planned for the next two fiscal years. In a feat of creative budgeteering, the city hopes merely to kick the can down the road on these increases—only to reinstate them in 2027 and 2028, by 4% and 3%, respectively. The city’s rationale is that in several years an economic recovery should be underway, and it will be OK to implement previous voter-approved tax increases. If things haven’t gotten better by then, the city will be able to impose further delays. These temporary cuts are why the city describes the plan as “revenue neutral”—not as a permanent tax cut.
• Anti-business measures remain. One San Francisco tax that really annoys CEOs is the Overpaid Executive Gross Receipts Tax, which is just what it sounds like—a levy on companies that pay their top honchos many times what typical workers make. Such moralistic tax policy might feel good and righteous to the politicians who craft it. But it targets the very people who decide where to locate their companies. Under the existing tax structure, the city estimates the tax would have brought in $140 million in the 2025-2026 tax year; under the new plan, it will instead yield just $28 million. Eliminating the tax altogether would have been cleaner than reducing it; keeping it still serves as an irritant to the fat cats the city can no longer afford to offend.
• A payroll tax stays in the picture. One of the most complicated aspects of the reform—and a genuine step in the right direction—is a move to tax companies predominantly on the business they do in San Francisco rather than on the number of people they employ here. The city ought to have gone all the way to a goods-and-services tax, levying a toll on every dollar that a company earns in the city. But it doesn’t believe the available data on this metric is reliable enough to model what this type of move would yield. A wrong call, negotiators believed, either could cost businesses too much or net the city too little. Keeping a mix of gross receipts and payroll taxes is a way to test the water.
But perhaps the least desirable aspect of this new grand bargain on business taxes is the fact that we, the citizenry, will have to vote on it. This mandate goes to the heart of why all of the contortions are needed in the first place. Because the measure will need to be enacted by ballot initiative this November, voters will have to weigh its pros and cons in the most upside-down way imaginable. No sane citizen will read the 111-page doorstop of a bill that they nevertheless will be asked to approve, but the changes can’t be made into law any other way.
In a rational, political world unafflicted by century-old unintended consequences of California’s Progressive Era, it wouldn’t work this way. Rather than cobble together a compromise amenable to every special interest and then having to sell this turducken of a tax bill to the electorate, the city’s elected leaders would try to do what’s best for the city and then ask voters to hold them accountable.
But that’s not our world. Instead, the biggest tax is on San Franciscans’ patience. Change comes slowly here—even when it needs to come quickly.