What the Measure Would Do
San Francisco’s business tax system has several features, including a payroll tax and a tax on a business’s gross revenues (referred to as “gross receipts”). Proposition F is intended to complete the city’s transition from a payroll tax to a gross receipts tax, a decision approved by the voters in 2012 (for more details, see “The Backstory”). To do so, it would make a number of significant changes to the current system.
Repeal of the Payroll Tax and an Increase in Gross Receipts Tax Rates
Today, because of the city’s unfinished transition to a gross receipts structure, most businesses in San Francisco pay both a payroll tax and a gross receipts tax. Prop. F would fully repeal the payroll tax while also increasing gross receipts tax rates by 40% across all industries, effective in January 2021.
The measure would also enact additional new increases to the gross receipts tax rates for a number of industries. Beginning in 2021, tax rates for the information industry would rise to match those of the professional, scientific and technical services industries. Beginning in 2022, a number of other industries would see stepped increases to the tax rates. The proposed gross receipts tax rates for all industries are shown in the table below.
Businesses that operate only an administrative office in San Francisco currently pay a 1.4% payroll tax instead of a gross receipts tax. This measure would increase that tax as well, to 1.47% in tax year 2022, 1.54% in 2023 and 1.61% in 2024 and thereafter.
Prop. F would delay rate increases for the administrative office tax and the gross receipts tax for certain industries if the city experiences continued economic strain.
Targeted Relief for Certain Industries and Small Businesses
The measure would also provide tax relief to small businesses and certain industries particularly impacted by the economic downturn trigged by the COVID-19 pandemic. Gross receipts tax rates for six industries would be reduced temporarily: retail trade; certain services (including maintenance and laundry businesses); manufacturing; arts, entertainment and recreation; accommodations; and food services. Industries whose tax rates are scheduled to decrease temporarily are denoted with a green highlight in the table below. Prop. F would also increase the threshold under which small businesses are exempt from paying the gross receipts tax. The current threshold is $1.17 million; this measure would increase it to $2 million. Prop. F would reduce annual business registration fees for businesses with $1 million or less in gross receipts by approximately 50% while simultaneously increasing the annual business registration fees for businesses with $1 million to $2 million in gross receipts.
New Tax Feature to Address Prior Approved Ballot Measures
Prop. F would also create a new tax feature allowing the city to unlock revenue from two 2018 ballot measures that are in litigation (both titled Prop. C). The Commercial Rents Tax and the Homelessness Gross Receipts Tax, both passed by the voters in 2018, have been generating revenue — but the money cannot be spent while both measures are being litigated (for more details, see “The Backstory”). This measure would create a new general tax that would be identical to the taxes approved by the voters in each of the prior Prop. C ballot measures. This “backstop” tax feature would only be triggered if those earlier propositions are overturned in court.1 In that case, the funds from this general tax would be used to reimburse businesses for the Prop. C taxes they’ve already paid, in addition to providing new revenue for the voter-approved purposes. The backstop, if triggered, would last for 20 years.
Charter Amendment
Finally, Prop. F includes a charter amendment related to the tax backstop feature. The prior Prop. Cs were special taxes with revenue dedicated specifically to homelessness services and child care. This charter amendment would also specify that revenue collected from the tax backstop feature should go toward the original purposes of the Prop. C measures.
The Controller’s Office estimates that Prop. F would unlock $963 million in fiscal year 2021–22 and $407 million in fiscal year 2022–23 from the two prior ballot measures and would create approximately 7,000 jobs over the next several years. The Controller’s Office also estimates the measure would raise an additional $97 million in ongoing revenue. Beyond the near-term impacts, the jobs created as a result of the tax changes would slightly outweigh job losses resulting from increased tax rates on the impacted industries.
Current Gross Receipts Tax Rates and Proposed Increases, by Industry
Industries whose tax rates would decrease temporarily are highlighted in bold. For industries noted with an asterisk, rate increases might be delayed if the city’s total gross receipts don’t exceed a certain threshold.
| Business Activity | Current Gross Receipts Tax Rates | Proposed Gross Receipts Tax Rates | |||
| Tax Year 2021 | Tax Year 2022 | Tax Year 2023 | Tax Year 2024 | ||
| Wholesale Trade | 0.075% to 0.160% | 0.105% to 0.224% | 0.105% to 0.224% | 0.105% to 0.224% | 0.105% to 0.224% |
| Manufacturing | 0.125% to 0.475% | 0.088% to 0.665% | 0.088% to 0.665% | 0.131% to 0.665% | 0.175% to 0.665% |
| Food Services | 0.125% to 0.475% | 0.088% to 0.665% | 0.088% to 0.665% | 0.131% to 0.665% | 0.175% to 0.665% |
| Transportation and Warehousing | 0.125% to 0.475% | 0.175% to 0.665% | 0.175% to 0.665% | 0.175% to 0.665% | 0.175% to 0.665% |
| Clean Technology | 0.125% to 0.475% | 0.175% to 0.665% | 0.175% to 0.665% | 0.175% to 0.665% | 0.175% to 0.665% |
| Biotechnology* | 0.125% to 0.475% | 0.125% to 0.475% | 0.181% to 0.689% | 0.181% to 0.689% | 0.194% to 0.736% |
| Information* | 0.125% to 0.475% | 0.560% to 0.784%
| 0.573% to 0.832%
| 0.579% to 0.855%
| 0.585% to 0.879%
|
| Accommodations | 0.300% to 0.400% | 0.210% to 0.560% | 0.210% to 0.560% | 0.315% to 0.560% | 0.420% to 0.560% |
| Arts, Entertainment and Recreation | 0.300% to 0.400% | 0.210% to 0.560%
| 0.210% to 0.560%
| 0.315% to 0.560%
| 0.420% to 0.560%
|
| Utilities* | 0.300% to 0.400% | 0.420% to 0.560%
| 0.435% to 0.580%
| 0.450% to 0.600%
| 0.465% to 0.620%
|
| Private Education and Health Services* | 0.525% to 0.650% | 0.735% to 0.910%
| 0.761% to 0.943%
| 0.788% to 0.975%
| 0.814% to 1.008%
|
| Administrative and Supportive Services* | 0.525% to 0.650% | 0.735% to 0.910%
| 0.761% to 0.943%
| 0.788% to 0.975%
| 0.814% to 1.008%
|
| Miscellaneous Business Activities* | 0.525% to 0.650% | 0.735% to 0.910%
| 0.788% to 0.975%
| 0.814% to 1.008%
| 0.840% to 1.040%
|
| Construction | 0.300% to 0.400% | 0.420% to 0.630%
| 0.420% to 0.630%
| 0.420% to 0.630%
| 0.420% to 0.630%
|
| Insurance* | 0.400% to 0.560% | 0.560% to 0.784%
| 0.580% to 0.812%
| 0.600% to 0.840%
| 0.620% to 0.868%
|
| Financial Services* | 0.400% to 0.560% | 0.560% to 0.784%
| 0.600% to 0.840%
| 0.620% to 0.868%
| 0.640% to 0.896%
|
| Professional, Scientific and Technical Services* | 0.400% to 0.560% | 0.560% to 0.784%
| 0.600% to 0.840%
| 0.620% to 0.868%
| 0.640% to 0.896%
|
| Real Estate* | 0.285% to 0.300% | 0.399% to 0.420%
| 0.413% to 0.435%
| 0.428% to 0.450%
| 0.442% to 0.465%
|
| Rental and Leasing Services* | 0.285% to 0.300% | 0.399% to 0.420%
| 0.413% to 0.435%
| 0.428% to 0.450%
| 0.442% to 0.465%
|
Source: San Francisco Controller’s Office
The Backstory
In 2012, voters approved Prop. E, a measure to replace the city’s flat payroll tax on businesses with a tax on gross receipts (revenues), which vary by type of business and amount of gross receipts. The change was structured to take effect over a five-year period starting in 2014, during which payroll tax rates would be gradually be reduced while gross receipts tax rates were phased in. However, the gross receipts tax has not grown sufficiently to fully phase out the payroll tax. In 2019, Mayor London Breed and Board President Norman Yee asked the city controller to convene a process for renegotiating the gross receipts tax rates in time to submit a proposal to the voters in November 2020. Negotiations were abandoned when the COVID-19 pandemic broke out in San Francisco, which led the mayor and the Board of Supervisors to propose competing tax measures. In July, a compromise to delay rate increases and provide tax relief to some industries resulted in Prop. F.
The other aspects of Prop. F – the new tax feature and the charter amendment – grew out of a 2017 California Supreme Court ruling. The ruling implied that special tax measures (tax measures that raise revenue for a specific purpose) placed on the ballot by voter initiative need only a simple majority to pass, instead of the usual two-thirds majority if they are placed on the ballot by a city council or a board of supervisors. In 2018, several such voter-initiated tax measures passed in San Francisco, including two gross-receipts tax increases to fund homelessness programs and child care services (the prior Prop. Cs). These measures have been challenged in court, and while their revenues are being collected, the money is currently impounded and cannot be spent. Prop. F would create an identical general tax that would fund homelessness and child care services and would take effect only if the city loses the litigation over the 2018 Prop. Cs.
Prop. F focuses on raising revenue not reducing costs, as is usual for revenue measures. For example, it does nothing to address San Francisco’s almost $10 billion in unfunded public employee pension and retiree healthcare liabilities. Annual city spending on retiree healthcare liabilities alone is equivalent to twice the budget of the Homeless & Supportive Housing department.2
Prop. F was placed on the ballot by a unanimous vote of the Board of Supervisors. As a general tax, it requires a simple majority (50% plus one vote) to pass.
Equity Impacts
San Francisco’s gross receipts tax rates are structured progressively: The businesses with the largest revenues pay the greatest amount. The rates also vary by industry and have been designed to levy higher burdens on business types considered to be the most profitable. This measure includes several features that speak to equity concerns. It would unlock over $1 billion in revenues to address homelessness with new programs and housing as well as provide child care services. Homelessness in particular disproportionately impacts people of color in San Francisco: Black people make up 37% of the city’s unhoused population, despite comprising less than 6% of the total population. Prop. F would also provide targeted relief to smaller businesses and to those industries most impacted by the economic recession, including hospitality and retail, which employ disproportionate numbers of workers of color.
Pros
- Because payroll taxes are levied on the money a business spends paying its workers, they can discourage hiring. In fully retiring the payroll tax, Prop. F would remove any disincentive to hire during the recession.
- This measure would unlock over a billion dollars for homelessness and child care services, resources that are urgently needed during a pandemic.
- Prop. F would appropriately (and temporarily) shift the tax burden to large companies and protect small businesses and industries like hospitality and retail, which face devastating impacts as a result of the prolonged economic shutdown.
- This measure would appropriately delay rate increases and tie future increase to overall economic health in the city.
- Prop. F would raise new revenue at a time when the city is facing historic budget shortfalls.
Cons
- Despite the delays, this measure would ultimately raise business tax rates for many industries at a time of significant uncertainty and economic strain.