San Francisco’s convoluted system of business taxation includes one levy unlike any other among the state’s large cities. To attract more companies to San Francisco and encourage existing employers to hire more employees, it is past time to do away with this tax.
This outlier is The City’s payroll tax, which imposes a 1.5 percent levy on business labor costs.
There are several reasons why city leaders should seek a more appropriate source of revenue. By taxing a company’s payroll rather than its overall earnings, the current system discriminates against labor-intensive businesses in favor of capital-intensive ones. It also applies to businesses with payrolls of $250,000 or more, thus placing a large tax burden on just 7,500 of The City’s 96,000 businesses.
Mayor Ed Lee and Board of Supervisors President David Chiu are proposing an overhaul that would phase out the payroll tax for most businesses and replace it with a gross-receipts tax. There are several benefits to this proposal, all of which make it worth backing as it heads toward the November ballot.
The new tax would raise no more money than The City’s current tax system. It would be phased in over five years, starting in 2014. Depending on a company’s industry and income level, its new tax rate would range from 0.075 percent to 0.55 percent of gross receipts taxed. Six industry-by-industry tax tables were devised to make the new system comparable in impact with the current payroll tax.
A gross-receipts tax would spread the tax burden among more types of companies, which would stabilize San Francisco’s tax base.
It also wouldn’t penalize companies for employing people or paying them well. And city policy wouldn’t give employers any incentive to shed employees during a downturn.
Finally, labor-intensive industries would be more likely to consider relocating to San Francisco under this system — a nod to Lee’s drive to attract more high-tech companies.
The proposal would exempt small businesses grossing less than $1 million. It also would exempt corporate headquarters, such as those of Gap and Levi’s, by letting them continue paying the current payroll tax rather than paying a gross-receipts levy on central office functions not solely dedicated to doing business within San Francisco.
But one part of this bundle needs adjustment — proposed new business fees. To pay for affordable housing after the dissolution of city redevelopment agencies, Lee had proposed an increase of 0.2 percent for the property transfer tax on properties of $1 million or more. But after encountering a backlash from real estate interests, Lee devised another way to raise that money — by increasing the fees that businesses pay to set up shop in The City. The problem is that these fees would increase even for small businesses. This is not wise; The City needs to make it easier for mom-and-pop shops to serve our communities.
But while these fees need to be revisited before the proposal goes to the ballot, the bulk of this proposal would be a smart reform for The City. It will no doubt face criticism in the coming months — especially from companies that don’t currently pay any payroll taxes to San Francisco. But by eliminating the hiring penalty and spreading San Francisco’s tax base across a larger pool of companies, The City would be making its tax policy more stable — and more fair.