If The City opted to modify its business payroll tax instead of switching to a gross receipts tax, it would be easier to administer, but not be as equitable nor act as a job creator, according to analysis by the City Controller’s Office.
Mayor Ed Lee and Board of Supervisors President David Chiu have advocated a new city tax system because they say the payroll tax penalizes job growth and discourages companies from remaining in The City.
If all goes according to their plan, voters would decide this November whether to do away with the 1.5 percent tax on payrolls exceeding $250,000 and replace it with a new model eliminating the shortcomings of the existing tax.
The City Controller’s Office is charged with coming up with an improved business tax structure. A final report is due by April 16 to Lee and Chiu.
Under the most recent gross receipts tax proposal, 33,500 San Francisco companies would pay that tax in some form, with 24,750 falling in the category with the lowest rates. The remaining 62,000 businesses do not generate enough gross receipts to pay the tax, but would pay an increased business registration fee of $150.
The gross receipts proposal also would increase business registration fees, currently at $25 to $500, to $150 to $500.
Against that backdrop, the San Francisco Chamber of Commerce requested an analysis of a modified payroll tax system amid concerns from its members about the gross receipts tax.
The chamber’s proposal included a progressive payroll tax with the highest rate at 1.2 percent and the lowest rate of .75 percent applied to businesses with payrolls of $250,000 or less. It also included business registration fees increasing to a range of $350 to $10,000, and proposed to apply the fee to nonprofits. A three-year $1 million payroll tax holiday was included for new businesses.
Modifying the payroll tax would be more equitable than the current system, the analysis found, but not to the degree of a gross receipts tax. In 2010, just 7,500 companies paid the existing 1.5 percent payroll tax.
The controller’s analysis concludes that a gross receipt tax model is superior when it comes to spreading the tax burden around and job creation. It would create thousands of jobs.
By switching to a gross receipts tax, businesses that currently do not pay a payroll tax or those that pay little but have large gross receipts, such as commercial real estate, would be most impacted.
Analysis is focused on a revenue-neutral proposal, but some labor leaders and members of the Board of Supervisors are advocating for a revenue increase. This fiscal year, The City is expected to generate $390 million in business taxes.