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San Francisco floats 80% cut to Overpaid Executive Tax to lure companies back

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(The Center Square) – Home of the worst performing COVID-19 recovery in North America, San Francisco is proposing cutting its “Overpaid Executive Tax” by 80% as part of a package of tax reforms aimed at getting businesses to come back.

In 2023, the consolidated city-county took in $206 million in revenue from the OET, but the city’s poor economic performance led S&P to downgrade San Francisco’s bond outlook from stable to negative, making it more expensive for the city to borrow money.

The OET, which entered into effect for fiscal year 2022-2023, is a gross receipts tax on businesses based on whether or not the highest-paid employees, whether or not they’re in San Francisco, earn more than 100 times the median compensation of that company’s San Francisco employees. As the ratio of executive to worker pay increases past 100, the tax scales even higher. Companies with ratios greater than 100:1 and less than or equal to 200:1 pay 0.1% on revenue in San Francisco, while those with a greater than 600:1 ratio pay 0.6% on gross receipts. The OET also has a payroll tax component, with companies with ratios greater than 100:1 and less than or equal to 200:1 subject to an additional 0.4% payroll tax, and greater than 600:1 an additional 2.4% payroll tax.

However, with San Francisco having the worst return of downtown occupancy of any city in North America, the city is proposing cutting the tax by 80% in a bid to encourage employers to bring their businesses back to the city.

“We are working every day to support our economic revitalization and create a more vibrant future for Downtown and our City,” said San Francisco Mayor London Breed in a statement. “San Francisco is a center of innovation and opportunity, but the world has changed after COVID. We need a business tax structure that reflects our new reality, and that supports and encourages businesses large and small to thrive.”

The proposal also includes raising the small business tax exemption to businesses with $5 million in revenue, which the city estimates will exempt 88% of all restaurants and half of retailers. The proposal would also reduce accommodation taxes by 13% and arts, entertainment and recreation taxes by 78%.

Driving these changes is the need for “reducing volatility and other risks stemming from overconcentration of business taxes on a small number of payers.”

San Francisco, like California, relies on taxing the earnings of a small number of high-income earners to fund much of its operations. Cyclical volatility in stock markets and the economy especially impact high-income earners, leading to more tax revenue volatility as dependence increases on a small group of earners. This dependence has left California, and its municipalities with similar tax structures, with some of the most volatile tax revenues in the nation.

If San Francisco is unable to lure back employers and their businesses, the city could enter a spiral where declining revenues drive credit rating declines that raise borrowing costs, forcing the city to cut services to service higher debt costs, thereby driving more taxpayers out of the city.