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Daily Tax Report: State

The More, the Better: San Francisco Leads New Kind of Tax Revolt

July 10, 2019, 8:46 AM

San Francisco is emerging as one of the most receptive places in the country for new taxes.

In recent weeks:

  • San Francisco leaders supported the proposed overhaul of the city’s gross receipts tax structure, which would be the fourth tax-raising proposal on the city’s November ballot.
  • A San Francisco Superior Court judge upheld an initiative raising commercial lease taxes to fund early childhood education and upheld a Salesforce.com-backed initiative imposing gross receipts taxes on companies earning more than $50 million to support homeless services.
  • A pair of recent court rulings upheld locally passed tax initiatives—including one backing the city’s authority to seek taxes from drivers who use paid parking lots at state universities—which could embolden tax enthusiasts in San Francisco even more.

“I think SF is going to be the poster child, one way or another, for aggressively looking for money from business,” Joseph Bankman, Stanford University professor of law and business, said in an email.

Expect a ripple effect as local officials around the state talk about what worked in San Francisco and how to push the envelope in their own localities, said Rex Hime, president and CEO of the California Business Properties Association. The trade group’s members include Target Inc., Regency Centers Corp., and CBRE Group Inc.

“I think we all know that once something violates the process that others certainly follow suit thereafter, so we anticipate there will be a lot of these kinds of elections up and down the state,” Hime said. The impact is clear for his members: “The property owners can‘t leave. The tenants can.”

Voters over the past two decades approved taxes to pay for services or programs on top of existing taxes used to cover bonds and schools. Governments and taxpayers probably haven’t yet reached the tax saturation point but may be there in a decade, said Larry Tramutola, an election consultant who shepherded successful sugar-sweetened beverage taxes in San Francisco, Oakland, Berkeley, and Albany, Calif., and Boulder, Colo.

“And no one knows when the golden goose is going to stop laying the golden eggs. But at some point, there’s going to be fewer eggs or no eggs in some communities. We just haven’t gotten there yet.” Tramutola said.

Setting the Trend

For now, San Francisco is the trendsetter. It’s the first major California city to test a state Supreme Court decision involving the Southern California city of Upland that supported the argument that tax initiatives by local governments can pass by a simple majority vote.

“The July 5th ruling would open the door for local governments to use the initiative process to avoid the two-thirds voter approval margin entirely and pass more special taxes, but next we will see how the Court of Appeal interprets the issues,” Laura Dougherty, a staff attorney with the Howard Jarvis Taxpayers Association, which challenged the initiatives, said in an email. Howard Jarvis and the California Business Properties Association filed a notice of appeal July 8.

San Francisco leaders, in addition to putting the gross receipts overhaul on the ballot, are supporting three new taxes for the November election: an excessive CEO salary tax, a 1.5% to 3.25% tax on shared rides, and a stock-based compensation tax.

“Regardless, all of these tax measures will require voter approval within the City and County of San Francisco,” said Kelly Salt, a public finance partner with Best Best & Krieger LLP in San Diego. “And as you well know, the cost of living there is already very high and will become more burdensome as a result of tax measures such as these. Ultimately, it is a matter of how much more of a tax burden voters are willing to tolerate.”

Gross Receipts Revamp

Mayor London Breed (D) and board President Norman Yee asked the city controller to develop a next-generation tax to replace the gross receipts structure voters adopted in 2012. That measure, also led by the Controller’s office, was implemented to phase out the much-despised 1.5% payroll tax. The payroll tax now stands at 0.38%, as the phase out hasn’t been completely revenue neutral.

Breed and Yee requested an initiative to create a more efficient tax system while ensuring the system is fair and equitable, including for small businesses. The effort would also identify ways to generate additional revenue to address the cost of housing and homelessness, support youth and families, improve behavioral health, and enhance the city’s public transportation system, a July 3 statement said.

An overarching plan is needed for San Francisco’s “current very complex patchwork of taxes, suspension of phase outs, more proposals on the way,” said Charles Moll III, a McDermott Will & Emery LLP tax law partner in San Francisco. But “any talk about a fair and equitable system usually means new and higher taxes.”

Michael Colantuono, managing partner and municipal finance attorney at Colantuono, Highsmith & Whatley PC in Grass Valley, Calif., shrugged at San Francisco’s latest effort. “LA periodically goes through business tax reviews. Goal is always to maintain or increase revenues while reducing bureaucratic impositions on business. Their lack of success explains why my So Cal office is in Pasadena,” Colantuono said in an email.

Fueling Tax Fire

San Francisco used the Upland decision for a City Attorney opinion to conclude “it seems very likely that voters may now propose special taxes by initiative subject only to majority vote.”

“In light of the multiple lawsuits filed to date, the courts or, ultimately, the California Supreme Court, will have to answer the question of whether the Upland ruling extends to the voter approval threshold for citizen initiatives proposing special taxes,” said Best Best & Krieger’s Salt.

Ultimately, Salt said, California voters may be the ones to answer this question by amending the state constitution. Until then, local governments leave themselves open for litigation whether they collect a special tax approved by majority vote or decline to collect it, she said.

San Francisco Dreaming

San Francisco’s push for new taxes may be replicated by other local governments.

“Locals are always eager for new revenues for many reasons that can lead to desperate measures such as trying to enact new taxes that often are not well designed. Locals face challenges of an eroding sales tax base in California. As we move to more services and digital goods, and less tangible personal property, locals see reduced sales tax collection,” said Annette Nellen, director of San Jose State University’s master of taxation program.

Many places that tax goods, say weights bought at Wal-Mart to use in the garage, don’t tax services, say fees at the local gym where users can lift weights untaxed, said Tracy Gordon, senior fellow in the Urban-Brookings Tax Policy Center.

“The point is it is consumption. People who have a lot of resources, you can decide whether you tax their income or yoga studios. Yoga studios are a great thing to tax because they’re not mobile because they’re trying to serve a community or neighborhood,” said Gordon.

Among those waiting to see what happens with San Francisco’s litigation are Oakland and Fresno. Oakland, across San Francisco Bay, is defending its decision to declare a parcel tax was valid even though the measure only received a majority vote. In the Central San Joaquin Valley, Fresno was sued for not validating a sales tax measure that only received 52.17% of the vote.

“If Oakland can, and others can as well, you’re going to see an avalanche of tax measures because the thing that has kept cities primarily from putting on tax measures is the difficult threshold of two thirds,” said Tramutola, the election consultant.

To contact the reporter on this story: Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com