San Francisco – Today Mayor London N. Breed, Board President Aaron Peskin, and Supervisor Rafael Mandelman announced next steps in the process to reform San Francisco’s business taxes, with a goal of placing a measure on the ballot in November 2024. A report issued today by Treasurer José Cisneros, Controller Ben Rosenfield, and the City’s Chief Economist Ted Egan analyzed the key vulnerabilities of San Francisco’s business tax system in the context of our post-pandemic recovery.
To initiate next steps in reforming the City’s business tax structure, Mayor Breed, President Peskin, and Supervisor Mandelman today requested that Treasurer Cisneros and Controller Rosenfield convene a process with the business community and other stakeholders to develop specific reform recommendations. The process will result in a public report back to the Mayor and Board of Supervisors by late 2023, to frame the development of a measure for the consideration of the voters in November 2024.
“San Francisco is a city with the talent, the tools, and the innovative spirit to continue be the economic heart of the Bay Area and California,” said Mayor Breed. “Our work to revitalize Downtown, strengthen our economy, and remain an economic leader requires us to change how we structure our taxes. We can set our business taxes to both deliver the important services we all rely on while also making us more competitive to attract and retain business. This will require partnership between City Hall, the business community, and stakeholders across the City — and it’s critical we start this process now.”
“Fiscal prudence and equitable tax reform are progressive values,” said Board of Supervisors President Aaron Peskin. “The voters of San Francisco have been remarkably generous in their adoption of taxes to strengthen our infrastructure and essential services, particularly for our most vulnerable communities. Our tax laws are intended to be dynamic to reflect changing needs, and these reforms are critical to meet this economic moment.”
“The analysis I requested makes clear that the post-pandemic shift to remote work is already eroding the City’s business tax base. Our unique vulnerability to a few companies moving their headquarters out of San Francisco demands that we urgently explore new ways to encourage businesses to locate and grow in San Francisco, as well as strategies to make our tax base more resilient, said District 8 Supervisor Rafael Mandelman. “The health of our downtown economy is essential for the City revenue. We need to make all our neighborhoods safer, cleaner, and more vibrant for everyone, and we ignore the current state of downtown at our peril.”
The report issued today by the Controller, the Treasurer, and the Chief Economist was requested by Supervisor Mandelman late last year to study how the City’s business tax system is being challenged by the shift to remote work.
“Business taxes generate critical revenue for San Francisco,” said Treasurer José Cisneros. “Reforming our business tax structure will help strengthen our City's economic future while fostering a thriving business environment.”
City Controller Ben Rosenfield stated, “Our post-pandemic economic and financial realities require changes to our approach to taxes in San Francisco. I’m pleased that the Mayor and Board recognize this and are prioritizing this important work.”
The report found:
- Business tax revenue increasingly relies on the technology, financial services and related office industries. These industries have embraced remote work after the pandemic, and reduced the amount of office space they lease, both in San Francisco and elsewhere. In this context, the City's high business tax burden, compared to alternative Bay Area office locations, may make it vulnerable to large taxpayers consolidating offices outside of San Francisco.
- Working from home can have a direct effect on how much tax a business owes the City, given the mechanics of how current taxes are calculated. Remote work has a sizeable fiscal impact on the City’s revenue.
- The City's tax revenue is increasingly reliant on commercial property, through its Commercial Rents Tax, and Transfer Tax. Remote work is likely to reduce the rent and value associated with commercial property, which will lead to future revenue weakness for the City.
- Voter-approved tax measures, along with structural changes in the city's economy, have created a highly progressive system in which the largest five businesses — who make up 0.04% of business taxpayers — pay 24% of the revenue. In addition to the risk of these businesses leaving the city, such a system is potentially unstable and runs counter to the policy goal of broadening the tax base to promote revenue stability.
Examining and reforming business taxes is a key step in the City’s efforts to revitalize Downtown. This includes implementing polices and a range of policies laid out in the Mayor’s Roadmap to Downtown San Francisco’s Future, which is the City’s plan to transform Downtown into a stronger, resilient, economic and global destination. The roadmap includes nine key strategies including attracting and retaining a diverse range of industries and employers.
Most recently, the Mayor and the Board of Supervisors reached agreement on tax reform measures to stabilize existing business by delaying tax increases and recruit new ones through tax incentives. The Board has also passed legislation authored by Mayor Breed and President Peskin to ease conversion of vacant office space and fill empty commercial space in the Downtown and Union Square areas.
“By reforming our business tax structure, we are clearing the path for San Francisco to remain competitive in today’s economic climate,” said Sarah Dennis Phillips, Executive Director of the Office of Economic and Workforce Development. “Our goal is to ensure our business tax system provides stable revenue that sustains service to San Franciscans, and fosters an economic recovery that enables all types of businesses to both start and stay in San Francisco.”