Pros & Cons — Unbiased explanation with arguments for and against
Information provided by League of Women Voters of San Francisco
The Question
Shall the City amend the Business Tax and Regulations Code to impose an additional gross receipts tax or an administrative office tax on businesses with a greater than 100:1 ratio of the compensation of the business’s highest paid managerial employee to the median compensation paid to the business’s employees based in the City; and increase the City’s appropriation limit by the amount collected under the additional tax for four years from November 3, 2020?
Note: This Pro/Con information is also available in Chinese and Spanish.
The Situation
The City currently imposes several taxes on businesses doing business in San Francisco. For example:
◼ The City collects a tax on gross receipts (Gross Receipts Tax) from some businesses at a rate of between 0.16% and 0.65% annually, which is deposited in the General Fund.
◼ Businesses with more than $1 billion in gross receipts, 1,000 employees nationwide, and administrative offices in San Francisco pay an administrative office tax (Administrative Office Tax) based on their payroll expense instead of their gross receipts. This tax rate is 1.4%of their payroll expense and goes to the General Fund.
◼ Not all business taxes collected are designated for the General Fund, which can be used for any City purpose. At present, one business tax dedicates 85% to funding early care and education for young children, with the remaining 15% for the General Fund. Another business tax is dedicated to funding services for homeless people and preventing homelessness
According to the August 2020 City Controller’s required report on the Mayor’s proposed budgets for the next two Fiscal Years (FY):
◼ The COVID-19 emergency and resulting public health mandates in 2020 negatively impacted the City’s business tax revenue base due to increases in unemployment, temporary and permanent business closures, and reduced employee commuting into the City. (Business tax revenue includes payroll tax, business registration fee, administrative office tax, and gross receipts tax.)
◼ FY 2020-21 business tax revenue is 20.9% less than what was budgeted.
◼ Next year’s business tax revenue (FY 2021-22) is budgeted to be 24% greater than the
proposed FY 2020-21 budget.
The Proposal
If passed, this ordinance would place an additional tax on some businesses in San Francisco when their highest-paid managerial employee (Top Executive Pay) earns more than 100 times the median compensation paid to their employees in San Francisco (Employee Pay). Taxes collected are to be deposited in the General Fund.
◼ For a business that pays the Gross Receipts Tax, if its Top Executive Pay is more than 100 times Employee Pay, the business would pay an additional tax from 0.1% to 0.6% of its San Francisco gross receipts.
◼ For a business that pays the Administrative Office Tax, if its Top Executive Pay is more than 100 times Employee Pay, the business would pay an additional tax from 0.4% to 2.4% of its San Francisco payroll expense.
If passed, it would also increase the limit on the City’s annual tax revenue spending by the amount of additional taxes collected under the proposed tax. The increased limit would last four years.
A “YES” Vote Means: If you vote "yes," you want to place an additional tax on some businesses in San Francisco when their highest-paid managerial employee earns more than 100 times the median compensation paid to their employees in the City.
A “NO” Vote Means: If you vote “no,” you do not want to make this change.
Fiscal effect
Controller's statement: sfelections.sfgov.org/sites/default/files/Documents/candidates/2020Nov/Prop%20L%20-%20Business%20Tax%20on%20Comparison%20of%20Top%20Executive%20Pay%20to%20Employee%20Pay.pdf
Supporters say
◼ San Francisco economists project a budget deficit of between $1.1 billion and $1.7 billion over the next two years due to the COVID-19 pandemic. Businesses with Top Executive Pay of more than 100 times that of Employee Pay can help the City recover by paying this added business tax.
◼ Over the last 30 years, executive salaries in the United States increased by 940%, while employee wages grew by 11%. Proposition L is intended to encourage businesses in the City to invest more in their workers by reducing the disparity between their Top Executive Pay and median Employee Pay.
◼ San Francisco is a desirable location for business headquarters. For businesses with disproportionately high Top Executive Pay compared to their Employee Pay, this tax is expected to increase the City’s yearly spending limit by the amount collected. That amount is projected to be between $60 million and $140 million annually.
Opponents say
◼ This added business tax won’t solve San Francisco’s looming budget shortfall. Future revenues are unpredictable due to the narrow base of expected taxpayers, annual fluctuations in value and form of executive compensation, and number of employees working in the City versus telecommuting.
◼ Market rates and executive experience influence what businesses and their boards of directors set for their Top Executive Pay. This attempt to redistribute wealth could provide an incentive for businesses impacted by this tax to leave San Francisco, resulting in reduced tax revenues. From 2018 to November 2019, 35 businesses in San Francisco are reported to have relocated out of state.
◼ Impacted businesses could avoid this new tax requirement. For example, they could reduce the number of their employees working in the City by allowing more of those employees to telecommute or by limiting new hires in the City.
Details — Official information
YES vote means
A "YES" Vote Means: If you vote "yes," you want to place an additional tax on some businesses in San Francisco when their highest-paid managerial employee earns more than 100 times the median compensation paid to their employees in the City.
NO vote means
A "NO" Vote Means: If you vote "no," you do not want to make this change.
Summary
Ballot Simplification Committee
The Way It Is Now: The City collects a tax on gross receipts (Gross Receipts Tax) from some businesses in San Francisco at a rate from 0.16% to 0.65% annually.
Businesses with more than $1 billion in gross receipts, 1,000 employees nationwide and administrative offices in San Francisco pay an administrative office tax (Administrative Office Tax) based on their payroll expense instead of their gross receipts. This tax rate is 1.4% of their payroll expense.
State law limits the amount of revenue, including tax revenue, the City can spend each year. State law authorizes San Francisco voters to approve increases to this limit to last for four years.
The Proposal: Proposition L would place an additional tax on some businesses in San Francisco when their highest-paid managerial employee (Top Executive Pay) earns more than 100 times the median compensation paid to their employees in San Francisco (Employee Pay).
• For a business that pays the Gross Receipts Tax, if its Top Executive Pay is more than 100 times Employee Pay, the business would pay an additional tax from 0.1% to 0.6% of its San Francisco gross receipts.
• For a business that pays the Administrative Office Tax, if its Top Executive Pay is more than 100 times Employee Pay, the business would pay an additional tax from 0.4% to 2.4% of its San Francisco payroll expense.
Proposition L would also increase the limit on the City’s annual tax revenue spending by the amount of additional taxes collected under the proposed tax. The increased limit would last for four years.
Financial effect
City Controller Ben Rosenfield
Should the proposed ordinance be approved by the voters, in my opinion, it would result in additional annual revenue to the City in the range of $60 million to $140 million, although results in a given year could vary from this due to economic conditions and the volatility of the tax. The proposed tax is a general tax that would be deposited in the City’s General Fund.
The proposed ordinance would create an additional tax that would generally apply to all businesses engaged in any business in the City where the compensation of the business’s highest-paid managerial employee (“executive pay”) compared to the median compensation paid to the business’s employees based in the City exceeds a ratio of 100:1. For businesses other than an administrative office, the tax rates would be a percentage of gross receipts attributable to the City and, depending on the executive pay ratio, would range from 0.1% to 0.6%. For businesses engaged in business as an administrative office, the tax rates would be a percentage payroll expense attributable to the City and, depending on its executive pay ratio, would range from 0.4% to 2.4%. For context, current City gross receipts tax rates range from 0.075% to 0.650% depending on a business’s industry and size. The ordinance increases the City's appropriations limit by the amount collected for four years.
It is important to note this tax would be a highly volatile revenue source to the City. The narrow base of expected payers, annual fluctuations in the value and form of executive compensation, and potential relocation risk associated with tax increases contribute to high volatility of the proposed tax, and estimates based on prior years’ activity may not be predictive of future revenues.
Published Arguments — Arguments for and against
Read the proposed legislation
