A major effort to overhaul San Francisco’s business taxes is on hold while the city addresses the COVID-19 pandemic and economic fallout, according to the city’s mayor.
The effort by city leaders to create a November 2020 ballot initiative to eliminate San Francisco’s old payroll tax, revise its gross receipts tax, and make other business tax policy changes was started when "we were living in a different reality," Mayor London Breed (D) said during an April 15 online press conference.
As the city moves forward in the wake of the pandemic, “there could be some changes, or revamp, of business taxes in general. But unfortunately, what we had planned before is something that we can’t continue to move forward with, especially now, in light of our new reality, with the economy,” Breed added.
City leaders in 2019 began working on a ballot initiative focused in part on completing the city’s transition from a payroll tax to the gross receipts tax approved by voters in 2012. Jay Cheng with the San Francisco Chamber of Commerce told Tax Notes April 16 that the city implemented an incremental transition from the payroll tax to the new gross receipts tax, with the former shrinking and the latter increasing over time as a share of businesses’ tax payments.
“It was a five-year shift, and tax revenue would be neutral, so the shift wouldn’t cost anything more” to businesses, while ensuring the city got the same revenue, Cheng said. However, by the end of the transition, the city hadn’t fully retired the payroll tax in order to generate sufficient revenue, and businesses are still paying roughly 25 percent of their business tax payments to the city through that levy, Cheng said. He noted that the current situation is a particular burden for small businesses that must handle compliance for two distinct assessments.
Breed and San Francisco Board of Supervisors President Norman Yee urged city controller Ben Rosenfeld in a July 2019 letter to develop a new ballot measure that would phase out the payroll tax completely and consider other business tax changes. The letter also called for a process that would involve multiple stakeholders and develop a comprehensive proposal taking into account multiple goals, including reducing the administrative burden of complying with the city’s business taxes, generating additional revenue to support efforts to address issues such as homelessness, and creating a more stable source of revenue for the city and a more predictable tax system for businesses.
In an email to Tax Notes, Sarah Owens of Breed's office said, “Mayor Breed and Board of Supervisors President Norman Yee had formed a working group to develop the measure in preparation for the November 2020 ballot," but the measure "had not been fully developed or introduced to the Board of Supervisors before the coronavirus pandemic hit.”
Yee’s office said talks on the potential tax overhaul effort hadn’t yet begun in earnest and that with the pandemic, stakeholders are now focused on responding to the current emergency.
Cheng said the chamber supports Breed’s decision and anticipates that the tax reform discussion will be resurrected as the city works to address the changed economic situation.
“We feel right now the mayor has made the right move — businesses are closing their doors every day. It’s not a great time to reform a business tax structure,” he said. “This will definitely have to be addressed structurally” in the future, however, he added.