The Deeper Magic of San Francisco’s Proposed Tax Makeover

For many years, loyal readers of San Francisco voter information brochures could reliably be entertained by Republican blabbermouth Terrence Faulkner. He often wrote up to four contradictory arguments for items on a single San Francisco ballot, and rarely, if ever, did voters see things the way he did.

And we mean it written: Faulkner filed his campaign arguments by hand and in capital letters. One can only imagine the glee of Elections officials as they typed up briefs like the following 2014 masterpiece opposing Proposition B:

Giacomo Casanova in “The Story of My Life” tells the story of how in 1733, at the age of 8, he was living in Venice and had a problem with nosebleeds:

“Leaving the gondola, we entered the hovel… (M)y grandmother gave the witch a silver ducat, after which the witch opened a chest… put me inside and locked it. … (She) rubbed my temples with a sweet-smelling ointment and… said that my bleeding would subside until I told her… what she had done to cure me…”

Prop. B, by the way, called for funding for public transportation. It passed with more than 61 percent of the vote.

Faulkner apparently passed the baton, if not the pen, to Larry Marso, a Republican lawmaker who emphasized his “principled opposition” to the city’s “progressive” Republicans. He offered the only argument against Prop. M, a radical proposed overhaul of the city’s tax structure.

Prop. M is a consensus measure developed and supported by every last vestige of San Francisco politics — and it is opposed by Larry Marso.

“Man,” says one long-time city politician who obviously supports Prop. M, “I Down I love this guy!”

With minimal opposition, unanimous organizational support, and a campaign bolstered by $500,000 from Google, $250,000 from Airbnb, and $110,000 from Ron Conway, Prop. M should be able to handle it (If voters won’t go blind when they get to the 13th of the 15 measures on the ballot and If can understand the confusing language of the ballot).

But what would that be? Down? The legal text for Prop. M is 112 pages long—not twice the length of Kafka’s “The Metamorphosis,” but the effect is no different.

By July 2023, it was clear that San Francisco would be forced to scrap its business tax structure after the pandemic. That’s when a city report revealed that San Francisco’s five largest companies paid about 24 percent of its business taxes. The 100 largest companies paid 58 percent of taxes.

So that’s a precarious situation. When 0.04 percent of businesses in a city pay the majority of business taxes, and 0.7 percent of businesses pay the majority, the city is vulnerable.

The five largest companies each pay $80 million to $100 million a year. And while the city has never named them, does it really need to? Think of a cloud software company with an eponym that’s even more phallic than most of the downtown office towers, or a search engine named after a really big number. That kind of thing.

If any of them were to uproot themselves and move to Austin, San Mateo, or Kuala Lumpur, it could create a budget hole similar to the one the general fund has for street repairs, libraries, or the Department of Recreation and Parks. That would be a problem even in times of prosperity, which we are not in.

Currently, business taxes in San Francisco are still largely based on payroll tax, where companies are charged based on the number of employees who actually do work in the city. This is, of course, a holdover from the days before remote work; there is an incentive for the city’s tycoons to actively to hold employees out of the office and leaving the city center in ruins.

Meanwhile, San Francisco’s tax burden is much higher than in nearby cities, meaning that companies that pay the lion’s share of business taxes in the city spend millions of dollars more for the fleeting benefit of having offices in San Francisco where employees don’t have to work.

Prop. M would address these issues in both an offensive and defensive way. It would significantly change the tax structure from payroll taxes to “gross receipts,” a tax on the business activity a company does in the city. That, in a heartbeat, would eliminate the tax incentives that reward companies for keeping their workers out of the city.

But it would do more than that: Taxing a company based on its sales in San Francisco rather than the number of employees in San Francisco obscurely reduces the tax savings for that company if it were to leave the city. That’s because it allows the city to continue taxing the company even if does decide to leave. Or even if it never had a foothold here.

It’s a complicated law, but it’s not like this: If you’re going to expand your tax base beyond the five or 100 largest companies, you reduce the tax burden on the richest and most powerful companies — and shift it somewhere else.

Giving a break to the wealthiest and most powerful companies isn’t an easy or intuitive sell to voters. You won’t see any of it in Prop. M’s optimistic ad campaign, which calls itself “Revitalize SF — Yes on M, Save SF Small Business.” That’s because the city doesn’t just give tax breaks, as Robin Leach says, to the rich and famous, but also to the poor and unknown.

And that Is easy and intuitive selling. Prop. M changes the definition of a small business exempt from gross receipts tax from one with about $2 million in annual revenue to one with $5 million in gross revenue. That means thousands of additional businesses, the kind that San Francisco voters care about. The comptroller estimates that 88 percent of San Francisco restaurants will be exempt, and 50 percent of retailers currently subject to gross receipts tax will suddenly find themselves outside the this.

So the fat cats will get a break. And so will the skinny cats. But you know who won’t get a break? The cats in between. In fact, any company with a small number of employees and high gross revenues is hurt. That would be law firms, hedge funds, architecture firms, management consultants, accounting firms, and others. They could benefit from more fat cat clients. But we could also see the mid-sized, middle-sized, fat cat companies leaving town.

The city has crunched the numbers and laid out the potential winners and losers if Prop. M passes. “Arts, Entertainment, and Recreation” organizations can expect an 80 percent tax cut, while “Food and Beverage Services” will save about 45 percent. A little surprise: The city I want for you to eat, drink, and be merry while resisting the narrative of doom.

The losers aren’t entirely surprising, either. “Retail” will pay an estimated 16 percent more — which, when factored in a new $5 million exemption for small businesses, translates to Very big retail. Utilities, meanwhile, would pay 59 percent more.

Why utilities? Well, some industries can’t rip out their buildings (or pipelines) and move elsewhere. And since “utilities” are largely PG&E, it’s not exactly a sympathetic target. Could PG&E lobby the state Public Utilities Commission to charge San Francisco ratepayers more? Perhaps, though it’s unclear whether the company could raise rates in a single municipality.

City officials coolly noted that when PG&E recently moved its headquarters to Oakland — and thereby avoided San Francisco’s payroll tax — it certainly didn’t reciprocate. reduction San Francisco utility rates.

Prop. M Winners and Losers: ‘Arts, Entertainment and Recreation’ to See 80 Percent Tax Cut, While ‘Utilities’ to See 59 Percent Tax Increase

There’s another Prop. M loser: Prop. L. If the corporate tax reform consensus gets more votes, it would repeal the proposed tax on robotaxi and ride-hailing companies to fund Muni. But you won’t see that in any ads.

There are two other reasons San Francisco government hopes you’ll vote for Prop. M, and you won’t see them in the upcoming lighthearted ad campaign either.

One is that, absent a “yes” vote, pre-pandemic tax increases that voters delayed in 2020 would take effect in January 2025, meaning all businesses would see increases across the board.

The second plaintiff is a lawsuit General Motors filed against the city in December 2023, seeking $121 million in back taxes and penalties based on its interpretation of San Francisco’s convoluted tax code. Other affected companies have suggested they will follow suit, and the city has so far set aside more than $400 million for “claims and litigation risks.”

It’s not certain that the $400 million will ever be recovered by the city, and you don’t stash the better part of a half-billion dollars in reserves because you’re so damn sure of your legal footing. But the city is betting that Prop. M, at a minimum, will result in more than $100 million per year in future taxes being used for city services, rather than being accumulated in a huge and growing “claims and litigation risk” fund.

But the city would rather you focus on the thousands of small businesses that stand to benefit. That’s not surprising: These happy tales could be a sweet-smelling salve that soothes San Francisco’s bloodbath.

Hfordersets

The Deeper Magic of San Francisco’s Proposed Tax Makeover

justin

justin

Related Posts