Multistate: West Coast Cities Consider and Adopt Local Tax Changes

Come November, voters in San Francisco may be asked to decide on changes to the City’s tax structure. Mayor London Breed and the San Francisco Board of Supervisors are considering ballot measures that would restructure the City’s tax regime. Currently, the San Francisco Gross Receipts Tax has two parts— a gross receipts tax component and a payroll expense tax imposed on the compensation earned for work and services performed within the City. One of the proposed changes is to repeal the payroll component and replace it with an increase in gross receipts tax rates for most types of businesses. Reportedly, this change is intended to “simplify the tax system for businesses in San Francisco and promote job creation since the Payroll Tax generally dis-incentivizes hiring.” Another proposed change would “unlock” approximately $300 million in funds that businesses have already paid for the Homelessness Gross Receipts Tax (November 2018 Prop C) and the Commercial Rents Tax for Childcare (June 2018 Prop C). These taxes are currently being held in an escrow account pending litigation over whether the propositions imposing the taxes needed a simple majority or a super majority voter approval to become effective.  The proposed ballot measures also include several policies to alleviate financial pressure on small businesses and businesses that are struggling financially to operate in San Francisco, including expanding the exemptions for small businesses to include businesses with $1.5 million or less in gross receipts. Finally, the Mayor is also considering putting general tax increases before voters. These would become effective once “the economy improves” and “provide tax relief for cost-sensitive industries,” Mayor Breed’s office announced in a statement.  

Further up the coast, the Seattle City Council recently approved the JumpStart Seattle revenue plan, which is described as a “progressive revenue plan to respond to the immediate COVID crisis and focus on Seattle’s long-term economic revitalization….” Beginning January 1, 2021, a new payroll expense tax would be imposed on persons doing business in Seattle that have over $7 million in payroll expense paid to employees primarily assigned to Seattle. The rate of tax depends on the business’s total payroll expense and the individual employee’s annual compensation; the rates range from 0.7 percent to 2.4 percent. No tax is imposed on payroll expense for employees making under $150,000.  For example, for businesses with payroll under $100 million, the rate is 0.7 percent on the payroll expense of employees with annual compensation from $150,000 to $399,999 and 1.7 percent for employees with annual compensation of $400,000 or more. The ordinance provides that the Director may adopt procedures to allow taxpayers that have payroll expenses consisting of work done and services provided within and outside Seattle to use a representative test period or conduct a survey based on factual data to arrive at a formula with which to calculate the percentage of payroll expense attributable to Seattle. The payroll expense tax will be due in quarterly installments, although the entire amount of tax due for the 2021 tax year will be due and payable on the same date that the tax payment for the fourth quarter of 2021 is due. The tax sunsets beginning in 2041.  The mayor has not yet signed the tax measure. Please stay tuned to TWIST for updates on these city tax changes.