The Negative Impact of a New Gross Receipts Tax in San Francisco

Among the long list of initiatives on ballots in San Francisco this November, residents will be asked to approve a new gross receipts tax to fund homelessness services. Proposition C would limit job opportunities in the city, while raising prices for consumers.

Proposition C would create a gross receipts tax on companies with more than $50 million in sales within San Francisco. The rate would vary based on industry, with an average rate of 0.5 percent. (This would be in addition to San Francisco’s existing gross receipts tax, which has rates between 0.16 percent and 0.65 percent.)

The San Francisco Controller’s Office estimated that the proposed gross receipts tax would raise $250 million to $300 million annually, with approximately 300 to 400 firms being impacted.

Proponents of the initiative argue that the tax increase would be borne by “the City’s very largest employers—not regular San Franciscans,” but that analysis falls flat. While large companies would bear the legal incidence of the tax, city residents would bear the economic costs of the taxes. As firms grapple with the increased tax liability, they will likely react in a few ways.

First, they will likely reduce job opportunities. Analysis by the San Francisco Office of Economic Analysis estimated that the proposal would cost the city 725 to 875 jobs. San Francisco businesses already pay a large amount in local taxes for their employees, an estimated average of $2,500. Proposition C would increase that amount to more than $3,700 a year, an almost 50 percent increase.

Second, firms might look to move outside of the city to escape the tax. The aforementioned figures do not account for any firm relocations that might happen, but raising taxes could encourage that behavior.

Third, the tax increase would likely result in higher prices for consumers. If a firm is unable to shift the costs of the tax to its labor force, by relocating or trimming employment, the firm will likely shift the increases to consumers. Price increases due to gross receipts taxes are well-documented.

Cities and states across the country continue to explore raising and creating new gross receipts taxes, even though the negative economic impacts are well understood and acknowledged. Raising a gross receipts tax in San Francisco could limit job opportunities in the city and increase prices paid by consumers.