Businesses may net tax breaks 

click to enlarge San Francisco has a payroll tax that assesses a 1.5 percent tax on the total compensation paid to employees. The tax kicks in when a payroll exceeds $250,000 for a business.
  • San Francisco has a payroll tax that assesses a 1.5 percent tax on the total compensation paid to employees. The tax kicks in when a payroll exceeds $250,000 for a business.

San Francisco’s small businesses could be in a store for a tax break.

Billed as a way to incite job growth, the proposal by Supervisor Mark Farrell would exempt taxes paid on up to $250,000 of payroll growth yearly for small businesses during the next four years.

The City has a payroll tax that assesses a 1.5 percent tax on the total compensation paid to employees. The tax kicks in when a payroll exceeds $250,000 for a business.

The legislation defines a small business as one with a payroll of $500,000 or less using 2011 as the base tax year. The small businesses that qualify could grow their total payrolls by $250,000 in the following years starting with the 2012 tax year without paying taxes on the growth.

For qualifying businesses, that could mean a tax break of up to $3,750 per year. Estimates suggest about 30,000 of San Francisco’s 80,000 businesses qualify as small businesses. The number that would qualify for tax break, however, would be much fewer. Last year, 6,884 businesses reported a payroll of between $150,000 and $500,000.

The City projects the tax break would result in the loss of up to $2 million in tax revenue annually, but Farrell says the money is being spent well.

“We’re creating jobs with the money,” Farrell said. “This money isn’t going down the drain.”

It will be difficult for The City to determine the specific impact the tax break had.

“The City will not be able to verify whether any new and relocated jobs resulted from the proposed ordinance or whether such new and relocated jobs would have otherwise occurred,” said a report by budget analyst Harvey Rose.

The Government Audit and Oversight Committee is scheduled to vote today on the legislation.

But there is a chance the proposal might not go into effect even if it is ultimately approved by the board. Mayor Ed Lee and Board of Supervisors President David Chiu are pushing a tax reform ballot measure in November that would change the business tax in The City to a gross receipts tax. If that is approved by voters then this tax break measure would terminate.

Despite this possibility Farrell is moving ahead with his tax break proposal.

“We can’t legislate on a what-if basis,” he said.

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