As Downtown San Fran’s Recovery Lags, a Tangle of Business Taxes Encourages Work From Home

San Fran does not need bailout money from the State or the Feds.  City government does not need to give businesses incentives to stay in town.  What it does need is a change in attitude—the anti-business, racist, bullying, let the criminals run the streets attitude.

“”Every time you order something from Amazon, you’re putting a knife in the heart of small businesses in the community,” he said.

But despite his dedication to San Francisco, during Covid he moved the Books, Inc. headquarters from SF to the East Bay. He also plans to downsize the accounting firm’s SF office, having opened 3 other Bay Area offices during Covid.

And the decision wasn’t hard.

“There’s no shortage of stories of companies moving out just because they’re getting nailed by SF taxes,” he said. “It’s everything. High rents, high crime, high homelessness and high taxes.”


As Downtown San Francisco’s Recovery Lags, a Tangle of Business Taxes Encourages Work From Home

Anna Tong, SF Standard, 8/5/22   

For decades, businessman Steve Mayer has invested in San Francisco’s community. Aside from his day job as the founder of an accounting and wealth management firm, he co-owns indie bookstores Books, Inc., along with several restaurants. He’s so passionate about local businesses he’s never purchased anything from Amazon.

“Every time you order something from Amazon, you’re putting a knife in the heart of small businesses in the community,” he said.

But despite his dedication to San Francisco, during Covid he moved the Books, Inc. headquarters from SF to the East Bay. He also plans to downsize the accounting firm’s SF office, having opened 3 other Bay Area offices during Covid.

And the decision wasn’t hard.

“There’s no shortage of stories of companies moving out just because they’re getting nailed by SF taxes,” he said. “It’s everything. High rents, high crime, high homelessness and high taxes.”

SF’s Tax System Encourages Work From Home

For Mayer, a large benefit to having workers at home was that his company’s SF tax liability dropped by two-thirds. That’s because SF calculates taxes in part based on the proportion of employees who work in the city; if workers are now at home in the suburbs, the company owes less tax to SF.

Proponents of business taxes point out that they have been popular with voters: a homelessness tax passed in 2018 with 61% approval and an overpaid executive tax passed with 65% approval. The architects of a new e-commerce tax that’s on the November ballot say they collected over 20,000 signatures, far more than were necessary.

“The tax polled at 74% support,” said Peter Stevens, Director of SF Community Engagement for Build Affordable Faster, the nonprofit behind the e-commerce tax. “I have a hard time finding another issue that has had such a high level of support, and a tax at that.”

The extensive social services and amenities such as world-class parks that the city provides are expensive and fundamental to what many residents consider its core values—and that money has to come from somewhere. The complaints of businesses and threats to move are considered par for the course, in this view, and not necessarily to be taken seriously.

“Companies are not leaving due to a tiny little half a percent tax on [revenue] over $50 million,” said Jennifer Friedenbach, one of the architects of the 2018 homelessness tax. “That has always been hyperbole.”

Still, tax revenues have already taken a hit: during the first year of Covid, the city collected 45% less on a big business homelessness tax, and 12% less in the tax for all businesses.

But even more troubling for city officials is that tax revenues may not bounce back because workers may not come back. The remote revolution is hitting SF particularly hard because the city is a software hub, with over two-thirds of its public firms in the coding business. Tech’s highly paid employees can easily work from their homes or beachfront chalets, so the tax savings become yet another reason to allow workers to stay remote. Over 50% of the city’s public companies have said their workers can stay remote for the foreseeable future.

“The pandemic opened up the world to ‘You don’t need an office to do business in SF to be recognized and be legitimate,'” said Kaylyn Kleinhans, state and local tax practice leader at accounting firm Sensiba San Filippo. “As more companies realize what their tax savings are, they are saying, ”We’re not going back to the office.'”

A client of hers saw its SF tax liability drop 88% during Covid, Kleinhans said.

With 75% of the city’s gross domestic product dependent on office work, a lot is at stake.

That hasn’t slaked the appetite for new business taxes. In late July, Supervisor Connie Chan proposed a “Green New Deal” business tax, and in November, voters will decide on additional taxes on big e-commerce retailers like Apple and Amazon.

To see how taxes might affect a company’s decisions, we estimated how much Square Financial Services, a division of Block, would owe SF in different scenarios, based on its 2021 revenue. The significant tax savings might be one reason why Block moved its largest office to Oakland and announced their employees could work remotely forever (though they have denied taxes had anything to do with it).

Whole businesses have sprung up to help companies decrease their SF tax burden. It is incumbent on the company to prove their employees aren’t physically working in SF, and these new businesses help companies do employee location tracking.

“Before the pandemic this was not even a thing we used to help companies address,” said Nishant Mittal, SVP at Topia, a tech company specializing in distributed workforce management. “In the last 18 months the number of companies who they want to know where their employees are physically performing work so they can save on SF taxes is off the charts.”

SF’s Business Taxes Dwarf Other Cities

SF’s business tax revenues are much higher than elsewhere, even compared to much larger cities like Los Angeles, which has six times the number of businesses. And revenues are several orders of magnitude more than local cities Oakland and San Jose, despite a similar number of businesses (SF and San Jose both have approximately 100,000 registered businesses, while Oakland has about 60,000).

A city’s political leaning appears to be divorced from its business tax revenues: Austin and San Jose are politically progressive, yet collect very little business tax, while other progressive cities like Seattle and Philadelphia are aggressive in collecting business taxes.

In addition to the high rates, SF’s business tax code is notoriously complex. While many cities have the entirety of their business tax code on one sheet of paper, SF’s Treasurer & Tax Collector hosts an entire web portal with videos and multiple FAQs pages. The staff of 60 includes auditors, data specialists and support staff who field over 50,000 annual inquiries.

Much of the complexity is due to SF’s desire to create a progressive business tax structure that takes into account differences across industries, rather than a straight income tax, according to the Treasurer & Tax Collector. Their unit dedicated to more straightforward property taxes collects twice the amount of money with less than half the staff.

Eric Anderson, Managing Director at Andersen, a local tax advisory firm, said SF seems to have a “disproportionate” amount of business tax audit activity when compared to other cities.

“To the city treasurer’s credit, he’s doing a good job,” said Mayer.

New Taxes All The Time

San Francisco has created 7 new business taxes since 2018. In contrast, San Jose and Oakland have each changed their business tax codes once in the past decade, according to city spokespeople.

With just 8,979 signatures and 50% approval required to create a new tax in SF, they have become a “political ploy to promote ideological agendas”, said Wade Rose of Advance SF, a business group that advocates on behalf of several large employers.

“These tax measures are being promulgated without a view to their impact on the economy of the city,” he said. “It just creates a very unstable business environment and businesses are risk-adverse. Businesses need stability in order to plan.”

But for politicians, new taxes have become feathers in their caps. Matt Haney, who went from local to statewide office this year, was behind a new tax on overpaid executives. Haney did not respond to a request for comment.

In June 2018, 51% of voters approved raising taxes on commercial landlords with funds going towards early child care and education. The ballot measure levied an additional 3.5% tax on commercial space rentals and additional 1% tax on warehouse space rentals.

In November 2018, 61% of voters approved a homelessness tax, which levied additional taxes on large businesses with sales over $50 million. The measure resulted in a bitter, public battle between Salesforce founder Marc Benioff, who supported the tax, and opponents like Jack Dorsey, Square’s founder and the Collison brothers, the Stripe founders. Square and Stripe have subsequently moved out of SF, though they have said the homelessness tax was not the reason why.

In March 2020, 70% of voters approved an extra tax on storefronts that have been vacant for over six months.

In November 2020, 65% of SF voters approved the the first-ever tax on companies deemed to have too highly-paid executives. The additional gross receipts tax kicks in if the highest-paid executive earns more than 100 times the median compensation of their San Francisco-based employees, and funds are intended for SF’s healthcare system.

In November, voters will decide whether to approve an additional tax on e-commerce companies. Funds would go towards guaranteed income for groups such as low-income pregnant black women and transgender residents, as well as small businesses.

A City Divided Over How To Go Forward

Business-friendly interests are advocating for dramatic changes in the City’s tax regime.

Advance SF says they want a moratorium on new taxes until the city can get its arms around whether there’s an impending recession and assess the true state of downtown recovery.

Some other groups like the Chamber of Commerce want to go further, and create tax breaks similar to former mayor Ed Lee’s controversial tax break for the mid-Market area—aka the “Twitter tax break”—which was implemented after the Great Recession. It ended in 2019 and saved tech companies $70 million. It was very unpopular at the end of its tenure, due to increasing enmity towards tech workers.

While taxes can only be increased by voter approval, SF’s Board of Supervisors can remove taxes, unless the tax’s language prevents them from doing that, according to the Treasurer and Tax Collector.

But the politicians who support more business taxes say that they’re reflecting what voters want. It’s a moral imperative for big businesses to help mitigate California’s notorious income equality, which has increased over time and was exacerbated by Covid, they say.

“Big companies that can afford to pay their executives million-dollar salaries every year can afford to pay their fair share in taxes to help us recover,” Haney Tweeted in July 2020, referencing the overpaid executive tax. “San Francisco has become one of the most unequal cities in the world. This is a targeted tax on big companies that can pay it.”

About Stephen Frank

Stephen Frank is the publisher and editor of California Political News and Views. He speaks all over California and appears as a guest on several radio shows each week. He has also served as a guest host on radio talk shows. He is a fulltime political consultant.

Speak Your Mind

*