SF Payroll Tax Needs to Go

Check out my op-ed in this morning’s Chronicle:

As an employer in San Francisco, I understand and respect the need to pay my share for city services. But when a love letter from City Hall reminded me of our annual payroll tax obligation, it didn’t just hurt my pocketbook; it offended my sense of rationality. How, with unemployment stubbornly high, does it make sense to punish companies for hiring?

Taxing payrolls makes hiring more expensive, and thus companies are less inclined to bring on workers. It even pushes employers out of the city. Recall that when Twitter threatened to establish its headquarters outside the city limits, City Hall caved and adopted the payroll tax break for Mid-Market employers. Zynga reaped benefits of a $6 million tax windfall for the same reason. Meanwhile, my eight-person company gets stuck with an annual bill that is big enough to sting.

Consider: San Francisco is the only city in California that levies a payroll tax, from which it generates around $400 million, or just under 6 percent of this year’s $7 billion budget. If that money were put toward hiring, then companies could bring on 4,000 more workers at an annual salary of $100,000.

Fortunately there is a simple solution: When the economy sours, San Francisco should abandon the payroll tax in favor of a gross receipts tax to make up for the lost revenue. It can always revert back to the payroll tax when the economy gets going again. This way, City Hall doesn’t have to take a budget hit in order to encourage hiring during tough times.

Manipulating the tax code to spur the economy activity is nothing new. Granting tax breaks for capital expenditures, a popular “stimulus” tax scheme, directly encourages companies to acquire assets and expand operations.

The same would happen with hiring if companies weren’t slapped in the face with a tax for every dollar they pay employees. True, they would pay for it through the gross receipts tax, but a basic understanding of how incentives affect behavior makes it clear that a broad tax on business income would have a less detrimental effect than taxing payroll.

This should not be considered a novel idea. It is simply a reasonable solution to an unreasonable policy.

Mayor Ed Lee and the Board of Supervisors have committed to reforming the business tax this year, identifying the current scheme as antigrowth. And Tuesday, Supervisors Mark Farrell and David Campos introduced a measure that would allow small businesses with payroll less than $500,000 to expand payroll by up to $250,000 without paying the 1.5 percent payroll tax on those new salaries. While I applaud the hat tip to small businesses, the proposal misses the point.

The politically feasible solution to the payroll tax is not to reduce tax revenue, but to tax smarter. A switch to taxing gross receipts during recessions gets supporters of higher taxes their revenue, while the Chamber of Commerce can claim defense of business during challenging economic times.

I may always have to pay for the privilege of filing the same document at three city offices within the same building, but the least San Francisco could do is stop discouraging local firms from doing exactly what we want them to be doing right now: Hiring.

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About Andrew Jeffery

Andrew is Co-Founder and Chairman of Cirios. Prior to founding Cirios, Andrew worked for seven years in New York in the mortgage finance business, managing a $500 million lending facility at The Winter Group, a mortgage investment company. Andrew is a published author, whose work has appeared in the Wall Street Journal, Bloomberg, Minyanville and HousingWire.Andrew is responsible for managing the Cirios investment portfolio.Andrew holds a degree in Economics from UC San Diego and is an avid trail runner.

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One thought on “SF Payroll Tax Needs to Go

  1. mikewilliamsenmikewilliamsen

    Government always takes the small minded approach to the big picture. Supported by the same San Francisco voters who imposed that crazy rent control, my sympathies go out to you, but I see no hope for your plea. There are some great office buildings here in Marin! No payroll taxes, no rent control, better schools, parking, better weather. And you would only be minutes from SF for those times you want to remind yourself why you moved to Marin. And houses are on sale! How much space do you need?

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