Ideas for city payroll tax substitutes could be damaging 

Two solutions to the widely embraced idea of altering the payroll tax in The City could end up hurting smaller businesses and nonprofits.

The City levies a 1.5 percent tax on the payroll of companies that have more than $250,000 in payroll expenses. However, that represents only about 6,000 businesses of the 80,000 registered with The City, according to a report.

Business leaders all along have lamented the payroll tax, saying it has done nothing to create new jobs. This led Mayor Gavin Newsom and city supervisors to ask the city controller to analyze changes to the current business tax.

The report released Tuesday outlines two alternatives: a progressive payroll tax, which would create a sliding-scale payroll tax between 1.2 and 1.5 percent. The reduction in payroll tax would be offset by a new tax on gross receipts for commercial-property renters.

A second alternative would eliminate the payroll tax and replace it with a gross receipts option, with a variety of rates for different sectors of the economy.

Both alternatives also include a new tax credit, allowing all businesses to reduce their tax burden by $1,500, according to the report.

“There are merits to both ideas and I look forward to having a discussion with the business community,” Supervisor David Chiu said.

While business leaders have embraced the notion of overhauling the current business tax, the plan would essentially increase rents for small businesses in commercial buildings, said Steve Falk, president and CEO of the San Francisco Chamber of Commerce.

At a time when San Francisco is facing a 16.2 percent vacancy rate in office space, raising rents isn’t going to help the economy long term, he said.

“We are not saying this is dead on arrival by any means,” Falk said of the proposal. “But we really have to look at the impact on small business and nonprofits before someone pulls the trigger.”

Gabriel Metcalf, executive director of the San Francisco Planning and Urban Research Association, said he would prefer The City tax entities creating environmental waste, such as a carbon tax.

“What we should really be doing is taxing waste, not work,” Metcalf said.

Tony Winnicker, spokesman for Newsom, said The City needs to proceed carefully when dealing with taxes on businesses.

“Some people will want to use this as just another excuse to raise taxes, and that’s very dangerous at a time when you have companies making major decisions about locating here, staying here or expanding their operations in The City,” Winnicker said.

Alternative approaches

Progressive payroll

  • Create two tiers; businesses would pay 1.5 percent on workers making $85,000 or more and 1.2 percent on those making less 
  • Levy 1.395 percent tax on local gross receipts of commercial real estate lessors
  • Allow all businesses a $1,500 tax deduction

Gross receipts

  • Eliminate payroll tax, except for corporate headquarters
  • Cut tax rate to 1.4 percent
  • Levy 1.395 percent tax on local gross receipts of commercial real estate lessors
  • Levy a tax on global gross receipts of all other businesses at varying rates
  • Allow all businesses a $1,500 tax deduction

Source: Office of the City Controller

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