Business Tax Changes:
Economic Impact Report

CITY & COUNTY OF SAN FRANCISCO

Office of the Controller

Office of Economic Analysis
Item #200648

07.21.2020

 2

Introduction
 The proposed legislation would make a number of changes to San
Francisco’s system of business taxes. The changes would require voter
approval, by a simple majority vote, at the November 2020 election.
 The revenues from two new taxes approved by San Francisco voters in
2018 have been impounded by the City Controller’s Office, because of
ongoing litigation. The proposed tax changes would permit the City to
expend those impounded funds, and replace the tax revenues for 20
years, if the City loses that litigation.
 Additionally, the proposal would eliminate the City’s Payroll Expense
Tax, reduce business registration fees for small businesses, and make a
number of adjustment to the City’s Gross Receipts Tax rates.
 The Office of Economic Analysis (OEA) has prepared this economic
impact report after determining that the proposed changes could
have a material impact on the city’s economy.
 The proposed tax is incorporated within a City Charter amendment
which also excludes the tax’s revenue from budget baselines. Only the
tax changes are considered in this report, as the baseline changes do
not affect the broader city economy.

 3

Policy Details
 Specifically, the proposed tax would make the following changes:
1. Providing a new revenue stream (a “backstop”) that would permit the
City to expend the impounded revenue now being collected from the
Commercial Rents Tax (“Baby C”) and Homelessness Gross Receipts
Tax (“Big C”). The backstop is an increase in Gross Receipts Tax rates
that mirror Big C and Baby C, and would go into effect for 20 years,
only if the City loses the litigation.
2. A repeal of the Payroll Expense Tax, effective in tax year 2021, funded
by an across-the-board increase in Gross Receipts Tax rates, of 40%.
3. A reduction of business registration fees, for businesses with $1
million or less in San Francisco gross receipts.
4. An increase in the small business exemption for the Gross Receipts
Tax, to $2 million. It’s 2019 level is $1.17 million.
5. Temporary reductions in Gross Receipts Tax rate for certain industries,
and phased, permanent, increases in Gross Receipts Tax rates for
other industries, as detailed on the following three pages.

 4

Proposed Temporary Rate Reductions
 The City’s Gross Receipts Tax has progressive tax rates, in which a
business faces higher tax rates on higher tiers of gross receipts.
 The proposed measure would reduce the tax rates on the lowest three
tiers (up to $25 million in gross receipts), for the following industries:
Retail Trade; Certain Services; Manufacturing; Arts, Entertainment,
Recreation; Accommodations; and Food Services.
 The rates reductions for all 6 industries would be, in tax years 2021 &
2022, equivalent to 50% of the existing rates below $25 million,
adjusted by the 40% increase to fund the elimination of the Payroll
Expense Tax. In tax year 2023, the reduction would be 25% of this
adjusted rate, and in tax year 2024 and afterwards, there would be no
reduction.
 Rates for all industries and tiers, for each year, are shown in the
Appendix.

 5

Proposed Rate Increases
 The proposal would change the rates that apply to the Information
industry, beginning in tax year 2021, by raising them to match the
rates that apply to the Professional, Scientific, and Technical Services
industry.
 Additionally, further stepped increases would apply, to the industries
and in the tax years shown on the next page. These increases are
shown as a percentage increase of current rates, for all tiers.
 In 2023 and 2024, the increases would be delayed by one year if total
San Francisco gross receipts for the proceeding year was below 90%
or 95%, respectively, of San Francisco gross receipts total for 2019. This
effectively defers tax increases if there is a major decline in the city’s
economy that continues to 2022 or 2023.
 The detailed rate increases by industry are shown on the next page.
Full rate detail is provided in appendix.

 6

Rate Increase Details

Business Activity
Certain Services
Retail Trade
Wholesale Trade
Biotechnology
Clean Technology
Food Services
Information
Manufacturing
Transportation and Warehousing
Accommodations
Arts, Entertainment, and Recreation
Utilities
Activity Not Listed Above
Administrative and Support Services
Private Education and Health Services
Construction
Financial Services
Insurance
Professional, Scientific, and Technical Services
Real Estate and Rental and Leasing Services
Administrative Office Tax Payers

2021
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%

2022
0%
0%
0%
5%
0%
0%
10%
0%
0%
0%
0%
5%
10%
5%
5%
0%
10%
5%
10%
5%
5%

2023
0%
0%
0%
10%
0%
0%
15%
0%
0%
0%
0%
10%
15%
10%
10%
0%
15%
10%
15%
10%
10%

2024
0%
0%
0%
15%
0%
0%
20%
0%
0%
0%
0%
15%
20%
15%
15%
0%
20%
15%
20%
15%
15%

 7

Estimated Revenue
 An estimate of the revenue changes associated with each of the
features of the tax proposal is shown on the table on the next page.
 The table assumes a resolution of the Big C/Baby C tax litigation, in the
City’s favor, in 2023, and that there is no revenue associated with the
backstop in that year or beyond. As stated earlier, if the City loses the
litigation, the backstop would replace the revenue of Big C/Baby C, as
a general tax, for 20 years.
 The table shows the Big C and Baby C revenues that have been paid,
or will be paid between now and 2023. This payment has and will
continue to occur, regardless of whether this proposal is adopted. The
proposal only permits the City to spend it prior to the final resolution
of the litigation.

 8

Revenue Impact of Policy Features, 2020-2025

Tax Feature
Unlocked Big C Revenue

Unlocked Baby C Revenue
Replace Payroll Tax with Gross
Receipts Tax Increase
Reduce Business Registration Fees
Raise Gross Receipts Tax Small
Business Exemption
Temporary Tax Reductions
Move Information to Schedule 6
Rates
Stepped Tax Increases
Total

Spending Use
Affordable Housing
Mental Health
Homelessness Prevention
Shelter & Hygiene
General Fund Re-Payments
Childcare
General Fund Distributions

2021
$197
$98
$59
$40
$197
$273
$107

2022
$94
$47
$28
$19
$0
$160
$28

2023
$0
$0
$0
$0
$0
$0
$0

2024
$0
$0
$0
$0
$0
$0
$0

2025
$0
$0
$0
$0
$0
$0
$0

General Fund
General Fund

$1
-$5

$1
-$5

$1
-$5

$1
-$5

$1
-$5

General Fund
General Fund

-$12
-$22

-$12
-$22

-$12
-$11

-$12
$0

-$12
$0

General Fund
General Fund

$30
$0
$963

$30
$39
$407

$30
$61
$64

$30
$83
$97

$30
$83
$97

 9

Economic Impact Factors
 The proposal will affect the city’s economy in three primary ways:
1. The backstop feature will allow the spending of Big C/Baby C
revenue, prior to the resolution of the litigation. This spending
will create a positive impact on the city’s economy, without any
offsetting negative impact on businesses.
2. Secondly, the proposal fully shifts the City’s business tax base
away from payroll expense, to gross receipts, which will create an
incentive to add payroll and employment in the city.
3. Thirdly, the proposal changes the Gross Receipts Tax burden,
across industries and businesses of different sizes. Since
industries in San Francisco differ in their sensitivity to the cost of
doing business, and their multiplier effects, these shifts may also
impact the city’s economy.
 The estimated net impact of the proposal on each industry, for the
years 2021-2024, is shown in the table on the next page.

 10

Change in Business Taxes by Industry, 2021-2024

Industry
Accommodations
Activity Not Listed Above
Administrative and Support Services
Arts, Entertainment, and Recreation
Biotechnology
Certain Services
Clean Technology
Construction
Financial Services
Food Services
Information
Insurance
Manufacturing
Private Education and Health Services
Professional, Scientific, and Technical Services
Real Estate and Rental and Leasing Services
Retail Trade
Transportation and Warehousing
Utilities
Wholesale Trade
Administrative Office Tax payers

2021 ($M)
-$1
$0
$0
-$2
-$1
-$2
$0
$3
$8
-$9
$16
$0
-$3
$0
-$6
$4
-$9
$0
$1
-$2
$0

2022 ($M)
-$1
$1
$1
-$2
-$1
-$2
$0
$3
$17
-$9
$30
$1
-$3
$1
$4
$5
-$9
$0
$1
-$2
$1

2023 ($M)
$0
$2
$2
-$1
$0
-$1
$0
$3
$21
-$5
$36
$1
-$2
$1
$10
$7
-$6
$0
$2
-$2
$3

2024 ($M)
$2
$3
$3
$0
$0
-$1
$0
$3
$25
-$2
$43
$1
$0
$2
$15
$8
-$3
$0
$2
-$2
$4

 Economic Impact Assessment

11

San Francisco Total Employment, 2019-25: With Proposed Tax Changes, and Baseline Forecast

The OEA used the REMI model to
estimate the economic impact of
the tax and spending changes
summarized on pages 8 and 10.

1,000

Total Employment in San Francisco (000s)

975

The chart to the left illustrates a
baseline forecast of city
employment, prepared since
COVID-19 emergency, and the REMI
estimate of city employment were
the tax proposal to go into effect.

950

925

The baseline forecast is for the city
to lose approximately 100,000 jobs
in 2020. 55,000 would be recovered
in 2021.

900

875

850

2019

2020

2021
With Proposal

2022
Baseline Forecast

2023

2024

2025

The tax proposal would raise the
number of jobs by about 5,500 in
2021, and 1,900 in 2022, due to the
expenditure of the unlocked Big
C/Baby C funds. In later years, when
no new backstop spending is
assumed, the job impacts are much
more modest.

*The estimate assumes a resolution of the tax litigation in 2023, and that the triggered tax increases are not deferred and go into effect in 2023 and 2024.

 12

Conclusions
 The COVID-19 emergency has dramatically worsened the near-term
economic outlook for the city. The baseline jobs forecast is for the loss
of 100,000 jobs in 2020, and no full recovery to 2019 employment
levels until after 2025.
 In this context, the tax proposal could improve the economy in the
early years; its expected impact of 5,500 jobs in 2021 would account
for 10% of all projected job recovery in the city next year.
 After the resolution of the tax litigation, when no new spending from
Big C and Baby C is expected, the economic impact would be much
more modest. An increase in employment in the City, and in City
contractors, would slightly outweigh the job losses in the industries
that face tax increases under the proposal.

 13

Appendix: Proposed Tax Rates by Industry

Business Activity
Certain Services
Retail Trade
Wholesale Trade
Biotechnology
Clean Technology
Food Services
Information
Manufacturing
Transportation and Warehousing
Accommodations
Arts, Entertainment, and Recreation
Utilities
Activity Not Listed Above
Administrative and Support Services
Private Education and Health Services
Construction
Financial Services
Insurance
Professional, Scientific, and Technical Services
Real Estate and Rental and Leasing Services
Administrative Office Tax (% of Payroll Expense)

2021
$0-1M
0.053%
0.053%
0.105%
0.175%
0.175%
0.088%
0.560%
0.088%
0.175%
0.210%
0.210%
0.420%
0.735%
0.735%
0.735%
0.420%
0.560%
0.560%
0.560%
0.399%
1.400%

2022
2023
2024
$1-2.5M $2.5-$25M $25M+ $0-1M $1-2.5M $2.5-$25M $25M+ $0-1M $1-2.5M $2.5-$25M $25M+ $0-1M $1-2.5M $2.5-$25M $25M+
0.070%
0.095% 0.224% 0.053% 0.070%
0.095% 0.224% 0.079% 0.105%
0.142% 0.224% 0.105% 0.140%
0.189% 0.224%
0.070%
0.095% 0.224% 0.053% 0.070%
0.095% 0.224% 0.079% 0.105%
0.142% 0.224% 0.105% 0.140%
0.189% 0.224%
0.140%
0.189% 0.224% 0.105% 0.140%
0.189% 0.224% 0.105% 0.140%
0.189% 0.224% 0.105% 0.140%
0.189% 0.224%
0.287%
0.518% 0.665% 0.181% 0.297%
0.537% 0.689% 0.188% 0.308%
0.555% 0.713% 0.194% 0.318%
0.574% 0.736%
0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665%
0.144%
0.259% 0.665% 0.088% 0.144%
0.259% 0.665% 0.131% 0.215%
0.389% 0.665% 0.175% 0.287%
0.518% 0.665%
0.644%
0.714% 0.784% 0.573% 0.665%
0.751% 0.832% 0.579% 0.675%
0.770% 0.855% 0.585% 0.685%
0.788% 0.879%
0.144%
0.259% 0.665% 0.088% 0.144%
0.259% 0.665% 0.131% 0.215%
0.389% 0.665% 0.175% 0.287%
0.518% 0.665%
0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665% 0.175% 0.287%
0.518% 0.665%
0.228%
0.228% 0.560% 0.210% 0.228%
0.228% 0.560% 0.315% 0.341%
0.341% 0.560% 0.420% 0.455%
0.455% 0.560%
0.228%
0.228% 0.560% 0.210% 0.228%
0.228% 0.560% 0.315% 0.341%
0.341% 0.560% 0.420% 0.455%
0.455% 0.560%
0.455%
0.455% 0.560% 0.435% 0.471%
0.471% 0.580% 0.450% 0.488%
0.488% 0.600% 0.465% 0.504%
0.504% 0.620%
0.770%
0.840% 0.910% 0.788% 0.825%
0.900% 0.975% 0.814% 0.853%
0.930% 1.008% 0.840% 0.880%
0.960% 1.040%
0.770%
0.840% 0.910% 0.761% 0.798%
0.870% 0.943% 0.788% 0.825%
0.900% 0.975% 0.814% 0.853%
0.930% 1.008%
0.770%
0.840% 0.910% 0.761% 0.798%
0.870% 0.943% 0.788% 0.825%
0.900% 0.975% 0.814% 0.853%
0.930% 1.008%
0.490%
0.560% 0.630% 0.420% 0.490%
0.560% 0.630% 0.420% 0.490%
0.560% 0.630% 0.420% 0.490%
0.560% 0.630%
0.644%
0.714% 0.784% 0.600% 0.690%
0.765% 0.840% 0.620% 0.713%
0.791% 0.868% 0.640% 0.736%
0.816% 0.896%
0.644%
0.714% 0.784% 0.580% 0.667%
0.740% 0.812% 0.600% 0.690%
0.765% 0.840% 0.620% 0.713%
0.791% 0.868%
0.644%
0.714% 0.784% 0.600% 0.690%
0.765% 0.840% 0.620% 0.713%
0.791% 0.868% 0.640% 0.736%
0.816% 0.896%
0.399%
0.420% 0.420% 0.413% 0.413%
0.435% 0.435% 0.428% 0.428%
0.450% 0.450% 0.442% 0.442%
0.465% 0.465%
1.400%
1.400% 1.400% 1.470% 1.470%
1.470% 1.470% 1.540% 1.540%
1.540% 1.540% 1.610% 1.610%
1.610% 1.610%

 Staff Contacts


Ted Egan, Chief Economist
ted.egan@sfgov.org