Dueling SF tax plans focus on receipts, not payroll S.F. budget

2011 mayoral candidate John Avalos meets for a brief Q&A with the editorial board of the San Francisco Chronicle to discuss his platform in San Francisco, Calif. on Sept. 22, 2011. 2011 mayoral candidate John Avalos meets for a brief Q&A with the editorial board of the San Francisco Chronicle to discuss his platform in San Francisco, Calif. on Sept. 22, 2011. Photo: Tim Maloney, The Chronicle Photo: Tim Maloney, The Chronicle Image 1 of / 3 Caption Close Dueling SF tax plans focus on receipts, not payroll 1 / 3 Back to Gallery

The next heated political fight at San Francisco's City Hall will center on whether businesses pay more local taxes - or just pay them differently.

Mayor Ed Lee and Supervisor John Avalos plan to introduce at the Board of Supervisors on Tuesday separate measures for the November ballot. Both intend to eradicate the city's payroll tax, which they agree unwisely charges businesses for creating new jobs. Both would phase in a gross receipts tax, which would tax businesses on the amount they earn each year.

But Lee and co-sponsor board President David Chiu say they want businesses to pay about the same amount into the city's coffers as they do now, while Avalos seeks to raise an additional $40 million each year for the city's general spending account.

Lee, a mayor known for perennially seeking consensus, directed his economic team to talk with business leaders in dozens of meetings over the past three months. He said the point is to introduce a measure supported by businesses that allows them to create more jobs.

"We believe we've kept everybody under a huge tent," Lee said. "I do not want to see winners and losers on this."

Voter approval required

But to Avalos, that's a missed opportunity in light of years of major budget cuts that have seen services reduced and fees increased. He said he has the backing of Supervisors David Campos and Jane Kim and will probably have others, too.

"We have huge needs in San Francisco that our budget can't quite stretch to meet," he said.

Both measures are being introduced as legislation, meaning they will wind through the traditional process of committee meetings and can be amended before the final vote on whether to place them on the ballot in late July. Both would need six supervisors' votes to appear before voters. The proposed tax changes, under state law, require voter approval.

Lee and Avalos said they'd vastly prefer to have one measure appear on the ballot, because the subject is complex and confusing. It's likely, City Hall insiders say, they will eventually merge their measures and seek about $25 million in extra revenue.

Lee has the backing of several business groups, while Avalos said he is supported by the city's biggest union, Service Employees International Union Local 1021; the American Federation of Teachers; and left-leaning community groups including Coleman Advocates for Children and Youth.

San Francisco is the only California city that uses a payroll tax. In the 1970s, the city used a hybrid measure that had businesses pay whichever was greater of a payroll tax or a gross receipts tax, but a similar system in Los Angeles was ruled unconstitutional in court in the late 1990s and San Francisco dumped its version.

Effects on job growth

A flat 1.5 percent payroll tax was adopted because most companies were paying it instead of the gross receipts tax and it is easy to administer. But companies have long complained that it curbs job growth.

After the switch, the city brought in $25 million less each year than it had under the hybrid system and paid businesses a one-time $70 million settlement to end lawsuits over its taxation system. Avalos says he is trying to recoup that money through his measure.

But Steve Falk, president of the Chamber of Commerce, says that's a ridiculous idea.

"Somebody has to set the record straight on this notion that the city lost money because of the business community when it's the city who had an illegal taxation system," he said. "This is not the time to raise taxes on businesses that are trying to create jobs."

Currently, business taxes bring $410 million into the city every year, the second-biggest source of money for the general fund after $1 billion in property taxes. The entire city budget is about $7 billion.

Lee's measure would raise an extra $13 million a year through increased annual business license fees, but that money is already pegged for his affordable housing fund and not for the general fund. The $13 million would replace a previously proposed real estate transfer tax that also would have appeared on the November ballot.

Avalos' measure would also raise that $13 million for affordable housing, but further spike business license fees to ensure an extra $40 million for the city's general fund.

Gradual shift to receipts

Both measures would gradually shift away from the payroll tax to a gross receipts tax under a strategy developed by the Controller's Office. The proposed gross receipts tax has six rate schedules, each for various types of businesses, and with rates within those schedules rising according to each business' total revenue.

A small business or self-employed person earning less than $1 million a year would pay no city taxes. A company making more than $25 million would pay as much as 0.65 percent of its gross receipts to the city.

Either measure would need a simple majority to pass.