San Francisco has become a cautionary tale in city management, and a recent report warns of the potential fallout as voters consider a new CEO tax—something some critics are calling a detrimental move for the tech center.
A study released by the Bay Area Council Economic Institute on Wednesday highlights that exorbitant business taxes are pushing companies out of San Francisco, making a true recovery from the pandemic increasingly unattainable. Even though the city’s salary employment still trails pre-pandemic levels by 8.6%, the office vacancy rate has surged to approximately 33%, which is the highest of any major U.S. city.
Business formation in the downtown area has plummeted, with the number of new companies diving from 711 in 2017 to merely 25 last year, as firms look for better economic conditions elsewhere.
The report arrives just as voters prepare to weigh in on Measures C and D, two rival proposals set for the June 2 ballot that could fundamentally change the city’s business tax framework.
The think tank’s findings suggest that a hypothetical payment processing company would owe around $60.5 million in corporate taxes annually in San Francisco, compared to just about $5.1 million in Seattle.
Similarly, a mock cloud storage company would be taxed at around $24.2 million, which is over three times the tax burden seen in competitive cities.
“Even though San Francisco has remarkable advantages in terms of talent and innovation, this report indicates that the tax system is worsening its competitive edge,” stated Jeff Bellisario, executive director of the Bay Area Council Economic Institute.
“Other cities facing the same post-pandemic hurdles have bounced back better than San Francisco. This underscores the critical importance of tax competitiveness, especially in industries where firms can draw on talent and investors from various regions.”
Measure C, supported by business groups, aims to broaden tax exemptions for small businesses and raise the revenue cap from $5 million to $7.5 million, while also fast-tracking planned tax hikes for larger companies, particularly through an increased executive compensation tax rate set to kick in by 2027.
On the other hand, Measure D, backed by labor unions and opposed by Mayor Daniel Lurie along with the city’s Chamber of Commerce, seeks to broaden the existing CEO tax by imposing it on all employees of companies, not just those working in San Francisco.
This measure would also substantially raise tax rates and require voter approval for any future reductions, effectively turning temporary taxes into a more significant, permanent revenue source.
Earlier in February, the moderate group Neighbors for a Better San Francisco revealed plans to allocate $10 million to repeal the CEO tax, while other political factions within the city are also voicing their concerns against the measure.
“While supporters of Prop. D are shutting their doors, other cities are welcoming businesses with open arms,” remarked Stephen Bass, co-director of the political advocacy organization GrowSF.
“Proposition D is a step back, reinforcing the policies that are driving jobs away and increasing vacancies. It’s a path to economic decline rather than recovery.”
The report from the Bay Area Council frames the upcoming election as pivotal, emphasizing that the already high business costs in San Francisco are forcing companies to rethink their growth strategies in the city.
San Francisco is certainly lagging behind other cities. For instance, while Austin has seen job growth increase by 17.4% since 2020, San Francisco is still grappling with significant setbacks. The city experienced its most substantial losses in office-based sectors like technology and finance, essential components of its economy.
The think tank’s report highlights taxes as a crucial factor in this equation.
San Francisco stands out as one of the few large cities that imposes taxes directly on businesses based on gross receipts, payroll, and other criteria—often leading to multiple tax burdens. Despite some recent reforms, many businesses are still facing higher bills, according to the findings.
For instance, after the latest changes, companies have seen their annual tax liabilities rise from about $19.2 million to $24.2 million.
The shift toward remote work has profoundly affected San Francisco’s tax revenue, with daytime foot traffic still hovering around 50% of pre-pandemic levels. The average monthly sales tax revenue downtown has plummeted to approximately $26 million from around $39 million before the pandemic.
Now, the city’s budget is projected to face a $643 million deficit over the next two years, prompting Lurie to initiate layoffs. Last month, he handed out 127 termination notices.
The city may need to lay off up to 500 additional employees as it strives to balance its finances.
“These decisions are difficult but necessary,” Lurie mentioned last month. “We’re committed to managing taxpayer funds responsibly while providing essential services, all in preparation for a prolonged recovery ahead.”
