A report released this morning by the offices of the city controller and treasurer finds that the mass onset of employees working from home and abandoning their San Francisco offices has blown an estimated $484 million hole in the city’s tax revenues.
Even still, the report also found that the city’s 2021 tax haul and gross domestic product reached all-time highs.
San Francisco is a Dickensian city, and the 15-page report reveals its fair share of coexisting best-of-times, worst-of-times realities. Of note, the $484 million in tax revenue the city lost via empty seats in downtown offices represents about a third of the overall Gross Receipts Tax and Homelessness Gross Receipts Tax haul (worst of times). But that tax haul, though diminished, still measured around $1.3 billion in 2021 (best of times).
Mostly, today’s report reveals that these are ominous and untenable times, and the city is facing an uncertain future. San Francisco is still taxing its businesses based on measures passed when demand from high-end businesses to locate here was insatiable, and office real estate was impossibly lucrative. That’s no longer the case, but the city still charges strikingly higher tax bills for companies that would open here — or remain here — rather than setting up shop only a few miles down the road.
Also, while San Francisco voters have enacted more and more taxes on city businesses in the past decade, they’ve also created a more progressive tax system; that is, the burden falls more heavily on large outfits than middling or small ones. While that may be fair, it has led to a situation in which a jarringly small number of gargantuan companies pay much, or even most, of San Francisco’s business taxes. As of 2022, the five largest companies in this city — representing 0.04 percent of the city’s businesses — accounted for a quarter of all business-tax revenue.
The city’s 100 largest companies, a 0.7 percent sliver of the overall total, pay 58 percent of the business taxes.
The fewer sources of major business tax-revenue the city has, the more volatile this funding becomes. If even one of those top-five businesses has a bad year — or scales back its San Francisco office footprint and/or moves to San Jose — the city stands to lose a significant chunk of its income.
“The worry is, if we are preventing businesses from locating here or remaining here through our business taxes, then we are losing general-fund revenue,” says Supervisor Rafael Mandelman, whose queries of the controller’s office led to today’s report.
“I don’t want to get too Arthur Laffer about it, but if we get an ever-larger percentage of zero, it’s not a great tax.”
‘This is the hard part of the conversation’
Today’s report is not an ostensibly political document, but the issues it touches on are intensely political. Whether to coddle or cudgel our businesses has, in heavy part, defined San Francisco’s political landscape in recent decades. And, making matters more difficult, the data is clear that San Francisco’s biggest and richest companies pay the lion’s share of its taxes, meaning that any steps to diversify revenue and render its sourcing less volatile will also shift the burden from the wealthiest companies to all the rest.
“That is the hard part of the conversation,” admits mayoral spokesman Jeff Cretan. “How to make the tax base stable and strong, as opposed to where it falls apart if one or two companies move out. If it was easy, it would’ve been done. So it’s gonna take some work.”
Board President Aaron Peskin added, “If you look at the post-covid recovery experience, we now have three years of data. The sky is not falling, but we are heavily reliant on a handful of taxpayers. This is not a ‘we’re on the precipice of a cliff’ conversation. This is a ‘we need to take stock of where we are and where we should go’ conversation.”
“Where we should go,” however, is a question many San Francisco-based companies may be asking. Within today’s report, the controller’s office tabulated the tax burden facing a hypothetical large company moving to or remaining in San Francisco, as compared to nearby cities. It found that “the business would pay at least 20 times more in San Francisco than in each of the other locations, except for Oakland, where the margin is narrower.”
In this calculation, Company X would fork over nearly $40 million in taxes if it were based in San Francisco. It would pay some $27 million in Oakland — but far, far less in nearby towns. In San Jose, the bill would be $171,000. In Fremont, it would come to less than $7,000.
In an era when you couldn’t grow a tech business without funneling thousands of people into offices, San Francisco — and its transit system — offered an invaluable asset. That’s no longer the case, but the city’s tax system is still set up as if it is.
While today’s report focuses on San Francisco’s lucrative but tenuous present, it also highlights the gaudy finances of the past two decades. The city’s gross domestic product has grown by more than $150 billion, and more than doubled, in the past 20 years. The city’s economy grew at a 7 percent annual clip between 2011 and 2021. In fiscal year 2002-03, the city received $3,003 in tax per resident (adjusted for 2022 dollars). And in fiscal year 2021-22, that total more than doubled to $6,838 per resident.
The business tax system San Francisco enacted since the turn of the century reflected this reliable spigot of money — and, increasingly, has left the city reliant upon it, and depending upon fewer and fewer sources.
Today’s report found no evidence that the high taxes San Francisco now levies on top-dollar real-estate transactions and commercial rents are inhibiting sales or rentals — rather, you can chalk that up to larger, overarching societal factors. But, once those overarching societal factors work themselves out, commercial property values and rents will figure to be far less, and the city’s ability to tax them as a revenue source for housing, childcare, etc. will also diminish.
“I think we need to look at our local business taxes, plural, in light of a forever change in the business environment,” says Peskin. “We need to have an honest discussion about it and now is the time to do it.”