A leading San Francisco politician is proposing to hike taxes on nearly every business in the City by the Bay.
David Chiu (D), president of the city’s Board of Supervisors, is proposing a new gross-receipts tax on commercial rents that would affect most of San Francisco’s 80,000 businesses. Most businesses in the city rent their space, and their landlords most likely would pass on the tax to them.
Chiu estimates the net impact of the tax plan would increase San Francisco’s revenues by close to $35 million.
San Francisco is already the only city in California with its own payroll tax. Opponents of the proposed new tax fear hiking office rents—especially during the current economic recession—would only increase incentives for businesses to leave San Francisco for other parts of the state, such as neighboring Marin County, which has lower taxes and unemployment rates than San Francisco and boasts warmer average temperatures, less crime, and better hospitals. Others fear some San Francisco businesses might leave California entirely.
Small Carrot, Big Stick
Chiu says he believes the opposite would happen. He wants to institute this new tax because it would strengthen San Francisco’s economy, he says.
A tax on commercial rents “is better for the economy because it actually spreads the business tax across more taxpayers,” Chiu told the San Francisco Examiner. Chiu also said his new tax would be met with a reduction in the payroll tax, presently at 1.5 percent for the lower tier of businesses, to 1.2 percent. Approximately 6,000 businesses in San Francisco pay the payroll tax.
Jason Clemens, director of research at the Pacific Research Institute in San Francisco and author of Taxifornia, a recent publication addressing the California tax system, said Chiu does not understand what taxes help or hinder job creation.
Corporate Taxes Bigger Influence
“If you examine the empirical research on taxes that have the largest effect on job creation and investment, the ones that have debilitating effects on those two items are personal and corporate taxes, not payroll taxes,” he said. “To lower unemployment you have to aggressively cut the taxes that companies pay. Empirically, prosperity does not happen when you have high corporate taxes. Lower corporate [tax] rates reinvigorate job growth.
“It is hard for many businesses in California, too, because the state of California’s entire tax system is a further punishment,” he added. “It specifically punishes companies [by imposing] unusually high state corporate taxes.”
Rob Black, vice president of public policy at the San Francisco Chamber of Commerce, agrees with Clemens and notes a tax on commercial rents would be equivalent to an extra jump in the corporate tax rate.
Black also stresses Chiu’s proposal would put a new burden on the many nonprofits and other foundations that operate in San Francisco and are already struggling to meet their budgets during a recession.
Nonprofits Included in Hike
“Supervisor Chiu’s proposal does not make it any easier for the business community to create jobs. This tax will have a negative impact because it boosts individual companies’ tax rates,” Black said. “His proposed commercial rents tax will also apply to nonprofits in the city, and they currently don’t have to pay tax and are [already] struggling.”
Clemens said the basic problem with California’s economy is that on both the local and state levels, tax rates far exceed those in other states.
“If you look at the total government tax picture—state and local level—California is already an outlier: California has the fourth-highest tax rates in the country,” he said. “The notion that [further increasing] local government revenues in California is good is not based on data. Somehow, other states and localities manage to deliver comparable, if not better, government services than California with lower tax rates. The economics are clear.”
No Action on Choices
Black said San Francisco’s politicians have shied away from instituting “Irish taxes” against government workers’ lavish pay and benefit packages and have avoided making difficult structural reforms to the city’s government. “Irish taxes” apply to the pensions and other expensive benefits received by government workers in Ireland, which the national government imposed last year.
Instead, Black said, San Francisco’s politicians have opted to “not make the tough choices.” He says a continued failure to make the tough decisions and focusing instead on tax increases will cause the city’s economy to shrink further and result in more service cuts anyway.
“It is tough to make decisions against public worker retiree pensions and make structural reforms,” he said. “But if they do not do that, we will fundamentally continue to have an erosion in services, no matter what they do with taxes. Raising taxes reduces the tax bases in San Francisco, which lowers their revenue more.
“San Francisco is already 50,000 jobs short of what we had in 2000, and most of the jobs that have already left are not going to come back because of the already high city tax burden,” he concluded.
Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.