Blog » blog

San Francisco’s technology sector is booming once again, the real estate market appears to be in full recovery mode and office vacancies are at record lows. The city’s economy is quick to catch fire, but it’s also prone to downturns. This has benefited the city’s coffers and the public services they support, but it forces difficult decisions when fortunes turn for the worse.

These boom and bust cycles have exposed the importance of consistent sources of revenue for the city. Repeated economic fluctuations — as well as the recent recession — have shown the inherent volatility of the city’s business tax. A flat 1.5 percent tax on all payroll expenses above $250,000, the business tax is the city’s second largest source of revenue for the general fund (it brings in approximately $410 million per year), behind only the city’s property tax. But the payroll tax has fluctuated dramatically from year to year. In fact, it has increased more than 10 percent year-over-year four times in the last decade and actually declined on four separate occasions in the same period.
 

Growth in Property Taxes, Business Taxes and Employment in SF

Click to enlarge chart >>

While property taxes have grown in almost all of the last 10 years, the payroll tax has experienced four years of losses. These fluctuations do not reflect growth or loss of employment.Source: San Francisco Consolidated Annual Financial Reports and California Employment Development Department.

To address this volatility, Proposition E on the November ballot would replace San Francisco’s payroll tax with a gross receipts tax, a more common and more stable tax structure found in cities throughout California.

As we explained in a previous post, the gross receipts tax is common in California, but it wasn’t the first choice of the state’s largest cities. From 1970 to 2001, San Francisco’s business tax required companies to pay either the city’s gross receipts tax or the city’s payroll tax, whichever was greater. Los Angeles used a similar system. Following legal challenges in both Los Angeles and San Francisco (the requirement to pay the higher of the two options was found to be unconstitutional), San Francisco agreed to a settlement of approximately $80 million and subsequently eliminated the gross receipts tax and applied a flat tax of 1.5 percent of payroll to all businesses. Meanwhile, Los Angeles implemented a gross receipts tax.

In the decade since the legal settlement forced the city to choose between the payroll or gross receipts tax, there has been general agreement that San Francisco’s business tax needs to be reformed but little consensus about how that might happen or what might succeed the payroll tax. SPUR and much of the business community have argued that we should restructure the city’s tax system to remove disincentives to hiring inherent to the payroll tax. Reform has been attempted at least three times in the last decade, but those efforts were ultimately unsuccessful. Instead, the city has more recently adopted a new tactic: payroll tax exemptions, also known as “governing by exception.”

Since 2001, the city has granted payroll tax exemptions to a number of companies to keep them from leaving San Francisco once they grew large enough to be affected by the payroll tax. Prior to 2011, these exemptions were used exclusively to grow the biotechnology sector. But in 2012, separate exemptions were also granted for stock-based compensation and for new businesses locating in the Mid-Market area, exemptions targeted largely at growing technology companies. These incentives have unquestionably been effective: Zynga and Salesforce maintained their corporate headquarters in the city, and technology companies have been attracted in droves to Mid-Market, starting a renaissance that has failed to take root in the neighborhood ever since the construction of BART down Market Street.

But something else has happened in the years since the city opted for the payroll tax: Two significant downturns and three economic booms have driven uneven growth. In fact, the city’s budget has increased by nearly 50 percent in the last 10 years while inflation grew only 31 percent. These cycles have been further exacerbated by the fact that these funds are driven by less than 10 percent of businesses in the city: Only 7,500 of the city’s more than 96,000 registered businesses pay business taxes.

Business taxes are certainly not the only reason that companies come to — or stay in — San Francisco. There are myriad factors that play into location decisions. But given the volume of voices that have called for tax reform, as well as some prominent relocations of major companies, it certainly can’t be ignored.

Proposition E would replace the city’s payroll tax with a gross receipts tax. Gross receipts taxes are significantly more complex than a payroll tax, but also have a number of different benefits:

• Slower growth and more jobs.The proposed gross receipts tax will grow more slowly over time than the payroll tax, and is projected to generate more jobs than the existing tax.
• Greater stability.Through various economic cycles, payroll tax revenues can vary wildly; gross receipts tax revenues are projected to be significantly more stable and predictable over time, with less dramatic shifts in revenue than with the payroll tax.
• More equitable.The payroll tax is a flat rate for all companies, regardless of size or profit margins that can vary dramatically by industry. By contrast, gross receipts will bundle industries by their ratios of payroll to gross receipts to approximate ability to pay. This structure generally mirrors that used in other California cities with gross receipts taxes, but it simplifies that structure with fewer schedules. What’s more, the gross receipts tax will apply to businesses located in tax shelters such as the Presidio of San Francisco. (Tenants there have enjoyed payroll tax exclusions under federal statute. Prop. E would end these tax shelters.)

How does a gross receipts tax work? To be honest, it can get very complicated, very quickly. But there are four main ways that Prop. E changes how businesses will be taxed in San Francisco:

1.  Industry-based rate schedules. Separates the business tax base into seven groups based on industry sectors. This structure mirrors that used in many other California cities but simplifies the structure with fewer schedules.
2. Progressive rates. Transitions tax rates from a flat tax to a structure in which rates increase as earnings increase. Companies pay a higher rate as they earn more. Conversely, companies pay a lower rate if they earn less.
3. Marginal rates. Creates tiers of rates that apply only to the specific range of gross receipts, rather than the entire amount of gross receipts, similar to personal income taxes. For example, a company in schedule 1 (see sample below) would pay 0.1 percent tax on gross receipts from $1 million to $2.5 million and 0.35 percent on all gross receipts from $2.5 million to $25 million. Companies in all schedules are exempt from the tax until they make at least $1 million.
4. Broadens the tax base. Increases the number of businesses paying the payroll tax to 15,500 from only 7,500 in 2010.

Sample Gross Receipts Schedule Under Prop. E

Schedule 1: Retail trade, wholesale trade and certain types of services.

More important than the sum of these benefits is the road traveled to develop Prop. E. Discussions with such far-reaching implications are frequently contentious, and several reform attempts in the past decade have ended with no change at all. This process, however, was marked in its collaboration and communication. In the first six months of this year, San Francisco Mayor Ed Lee and Board of Supervisors President David Chiu worked with City Controller Ben Rosenfield to conduct a months-long outreach process. Involving literally hundreds of companies and other stakeholders, and informed by detailed analysis, the final proposal is the result of sustained engagement and extensive collaboration. This level of complexity seldom yields perfection, but this is certainly a preferable route to contentious fights that lead to no change.

One of the compromises achieved by this process was around new revenues. Though not the original intention, Prop. E generates $28.5 million of new revenue for the city’s General Fund. These funds are not programmed for anything specific at this point, but strong commitments have been made to direct funds to SPUR priorities such as affordable housing and the Housing Trust Fund, as well as to Muni maintenance and operations.

Given this level of complexity, the road to passage will be anything but easy for Prop. E. With a number of other important measures on the November ballot, tax reform is a topic to which few voters pay attention. Previous efforts, while not as well developed or supported, have suffered at the ballot for lack of understanding. And regardless of the collaboration and extensive agreement, the minutiae of the measure could complicate matters significantly when it reaches voters.

But for all of these reasons, Prop. E also presents a tremendous opportunity. The stars seldom align to present the voters with a unified front for such a complex change, and we should seize the moment — and the momentum — to make the transition.

This is the time for San Francisco to move past the payroll tax. Join us in supporting Prop. E on November 6.

Still have questions? Look for our complete ballot analysis in the SPUR 2012 Voter Guide.

Richard Carranza has been an educator for more than twenty years.  He has seen firsthand how student learn better when they’re healthy and nourished.  And, as a father of two daughters enrolled in the city’s public schools, he’s heard firsthand that students want better food in their cafeteria.  Professionally and personally, he understands that school food is integral to the lives of students and the success of the District.  And, as the new Superintendent of San Francisco Unified School District (SFUSD), he is in a position to improve the school meals program.

But, as Superintendent Carranza made clear at a September 6 forum at SPUR, he and the District face significant obstacles. 

Primary among the challenges is funding.  The $18 million budget of the school meals program is supported mostly by revenue from the 27,000 breakfast and lunches as well as the 6,000 snacks that Student Nutrition Services serves each day. In San Francisco, like in many other urban school districts nationwide, the majority of the students eating school meals receive the meals for free.  In exchange for providing the meal, the federal government, in the current school year, will send the District a reimbursement of about $2.90 per lunch and $1.55 per breakfast.  The students who don’t qualify for a free meal pay $3.00 per lunch and $1.50 per breakfast.  The combined revenue of reimbursements and sales is used to cover the costs of the school meals program: food, labor, distribution and management.  In San Francisco, the revenue has not been enough to cover the costs and the District has offset shortfalls in the school meals program by transferring money from the District’s general fund. Student Nutrition Services has begun reducing this deficit in the past two years and may be able to increase efficiency more in the coming years.  But, even with greater efficiency, the District will continue to face a difficult fiscal position so long as increases in food and labor costs continue to outpace increases in the federal reimbursement rate.

Compounding the difficulty of raising revenue is the criteria that defines who qualifies for a free or reduced meal.  The federal government, which sets the standard, has one threshold for the entire lower 48 states, with separate rates for Hawaii and Alaska.  A family of four only qualifies for a free meal if their household income is less than $30,000 per year – regardless of whether they live in San Francisco or a small town in Mississippi. In San Francisco, 50% of public school students meet that threshold, which is a sobering statistic.  But, according to the Food Security Task Force, a family of four in San Francisco could be food insecure even with an income twice that. The result is that many hungry students receive free meals from the District, which has a policy of feeding any hungry student regardless of their ability to pay, but the District cannot receive a full reimbursement for that meal because those students don’t fall within the poorly calibrated federal definition of poverty.

A third significant challenge for the school meals program’s financial picture is that fewer students are choosing to eat the meals.  They are, as the Superintendent put it, “voting with their feet.” The number of SFUSD students eating school meals (called the “participation rate”) is significantly lower than that of comparable districts and has declined since 2009.  And, the fewer students who eat the meals, the less revenue SFUSD receives. 

Despite these challenges, Student Nutrition Services has made considerable improvements in the past few years.  They have, among others successes, installed a point of sale system that expedites meals service and provides valuable data to managers, reduced the paperwork for enrolling families in the free and reduced meals program, and improved the nutritional standards of the food that is served.  This has helped SNS begin to reverse the deficit trend including recently lowering the deficit covered by the District’s general fund from $3.5 million in 2009-10 to $2.5 million in 2011-2012 (see: 2 hours and 43 minutes into the video).

Alongside these improvements, however, kids continue to vote with their feet. Many choose to eat bag lunches from home, off-campus, or not at all.  As a study recently published by the San Francisco Food Bank details, many factors influence their choice: the amount of time they are given to eat, social pressure and stigma, the number of meal options, the cafeteria environment, and, perhaps most of all, the quality and appeal of the food itself.  The report, which was inspired by a goal of “more kids eating better food” at school, provides an extensive list of recommendations for how SFUSD can improve the current program, including calls for: increasing the number of management staff (which the District has begun to do), remodeling of both kitchen facilities and cafeterias, soliciting greater participation in the free and reduced lunch program, and many management suggestions. 

Long-term, though, the question for how to substantially improve the school meals program in San Francisco remains.  Superintendent Carranza reported that the District is beginning a planning process to produce a 5-year strategic plan addressing the issue and is also reissuing its meal service contract for competitive bid among contractors.  The challenges for improving SFUSD’s school meals program are considerable, but these steps and others outlined by the Superintendent are strong indications that there is a new energy, focus and commitment to tackling the issue at the highest levels of the District.

In recent decades, San Francisco’s waterfront has been home to some of the city’s most transformative projects, including Mission Bay, AT&T Park, China Basin and the South Beach neighborhood. Today the waterfront is once again where many of the city’s largest and most exciting development proposals are taking place. Several new plans along the bay — including Seawall Lot 337/Pier 48 (also known as Mission Rock), Pier 70 and the Warrior’s Stadium — are proposing to make their mark on the city. At the same time, San Francisco is hosting the America’s Cup races in 2012 and 2013. Throughout the fall, SPUR will be hosting a series of forums exploring planning on the waterfront.

Mission Rock
Located just south of AT&T Park, Seawall Lot 337/Pier 48 is one of the most interesting development opportunities in the city. Currently home to a large surface parking lot serving AT&T Park, Mission Rock will create a mixed-use development featuring a large waterfront park on the northeast corner of the site. The plan also calls for breaking down the site into a series of small, walkable blocks (at a finer grain than those in neighboring Mission Bay). The Port of San Francisco is working with the SF Giants and the Cordish Company to further refine this plan. We’ll be hearing the latest on October 29 at SPUR’s forum The Future of Mission Rock.

Pier 70
To the south of Mission Rock and east of the Dogpatch neighborhood sits Pier 70, a 69-acre site that includes many beautiful historic structures desperately in need of repair and conservation, as well as a the largest floating dry dock on the west coast of the Americas. The Port of San Francisco has engaged in a lengthy planning process to find ways to preserve the waterfront’s rich history and create new parks while protecting maritime and industrial needs. At the same time, the plan invites new development to create a place for innovative industries and new residents. The port is working with Forest City to bring this plan to fruition. SPUR will host a forum on Pier 70 on November 29 and a walking tour on October 17.

Warrior’s Arena
Another major project on the waterfront is the plan proposed on Piers 30-32 and Seawall Lot 330 for a privately financed, multi-purpose entertainment and commercial complex that includes a new facility for the Golden State Warriors basketball team, complementary maritime uses and substantial new public access and open space on the pier. This project would host not just Warriors games, but conventions, performances and special events. Located just south of the Bay Bridge, Piers 30-32 are within walking distance of AT&T Park and served by Muni’s N-Judah and T-Third lines.
 

As always, SPUR will be tracking and weighing in on all of these important projects, which collectively have the potential to make an enormous positive impact on the waterfront, as well as helping enable the port to repair and seismically upgrade some of its deteriorating infrastructure. For more on SPUR’s perspective on waterfront planning, see our report Hard Choices at the Port of San Francisco. 

A cadre of 45 urbanists gathered downtown on a recent Sunday morning to join SPUR San Jose Director Leah Toeniskoetter for a bike tour. Beginning in the urban plaza fronting Philz Coffee, our mighty bike train easily navigated its way along the brand new buffered bike lanes of Third Street, en route to Japantown. A project of the City of San Jose, the extra-wide bike lanes are a product of recent “road diets” on certain streets, where three lanes of auto traffic were reduced to two in order to add the buffered bike lane.

The new lanes easily accommodated the group as it cruised past St. James Park and through the Historic Hensley District, known for having the highest concentration of Victorian homes in the city’s central core. San Jose Director of Transportation Hans Larsen noted that the district really came to life in 2005 when road diets were applied to the section of Third and Fourth streets in the Hensley District, calming the fast three-lane, one-way streets to a slower two-lane, two way street with bike lanes.  The transition has prompted continued investment in the historical character of the neighborhood.

In no time at all, the two-wheelers turned onto Jackson Street, the main road through the Japantown neighborhood — one of only three historical Japantowns in the United States. The heart of this district was embodied by the tables full of people outside of Roy’s Station, a gas-station-turned-coffeehouse on the corner of Jackson and Fifth streets. After passing the Sunday farmers’ market at the site of the old City of San Jose Corporation Yard, the group continued into the heart of the Northside Neighborhood District’s Luna Park Business District surrounding Backesto Park. Winding its way back through the neighborhood’s charming homes to the newly installed Tenth Street buffered bike lanes, the group made a straight shot back to the center of downtown and onto the San Jose State University campus.

As the oldest public institution of higher education on the West Coast, the SJSU campus is full of serene quads with surprises such as the Black Power Statue, the historic and architecturally significant Tower Hall, built in 1910, and the first library (Dr. MLK, Jr. Library) in the nation to be jointly owned by a city and university.

After snaking through the campus the bicycle caravan entered the city’s first protected bike lane, which runs along Fourth Street on the campus’ western edge. The group then circled back to San Fernando Street, the main bike route between campus and historic Diridon Station, the second busiest train station in California.

The tour then led to the Alameda, built in 1799 as the connection between Mission Santa Clara and the Pueblo of San Jose. In 1868, the Alameda became the state’s first interurban horsecar line and, in 1888, it became California’s second electric trolley line, after San Diego. Previously State Route 82 but now under the purview of the City of San Jose, the Alameda is expected to undergo an extensive upgrade in the Fall of 2012.

With a turn into the Rose Garden neighborhood the caravan passed the Rosicrucian Park and Museum, home to the largest collection of ancient Egyptian artifacts on display in Western North America, and wound its way around another beautiful neighborhood, with homes dating to the 1920s and 1930s. A tour of the Rose Garden neighborhood wouldn’t be complete without passing its namesake, the San Jose Municipal Rose Garden, a 5.5 acre city park filled with more than 3,500 bushes and 250 varieties of roses cared for by local volunteers.

A quick venture into the Shasta-Hanchett neighborhood, lined with Craftsman houses built between 1900 and 1920, led the group back to the Alameda, through the Cahill Park neighborhood and then to Park Avenue, another bike route into the downtown. A turn onto the Guadalupe River Trail, a separated bike path that runs along the Guadalupe River Park, guided the caravan straight through the 32^nd annual Italian Family Festa of San Jose. After riding past stands offering fresh cannoli and other treats, the group traveled just a few blocks further to finish the tour at the San Pedro Market, having experienced a new way to see at least a small portion of what San Jose’s biking landscape has to offer.