San Francisco Headache: Is the 40% Income Tax Worth It?

Tax ‘season’ is over and when you filed your own taxes you probably breathed a sigh of relief. Accountants work 60-70 hours a week during the federal filing season (January-April) and need a good massage by the time they submitted their last return. However, the relief is short-lived as the end of the quarter is coming around and payroll taxes are due. Payroll taxes are taxes corporations pay on the salary or wages they give to their employees. Both the federal and state governments levy some form of payroll taxes. The most common are unemployment taxes which support the part of the population that is unable to obtain work. California, known for droughts, high taxes, and hefty regulations, is always on the forefront of discovering new ways to tax businesses. Recently, the city of San Francisco decided to impose a city-wide payroll tax of 1.5%. The percentage seems small but combined with federal and state taxes, it makes doing business even more costly. San Francisco corporations are subject to federal income taxes, federal payroll taxes (Social Security & Medicare), state business tax, state franchise tax, state alternative minimum tax, state payroll taxes, municipal gross receipts tax, municipal payroll tax, and depending on what you are selling, a myriad of excise taxes levied on gasoline, cars, alcohol, and tobacco.

Corporations have generally enjoyed the San Francisco Bay Area despite the high costs of taxes and regulations. Managements have favored the highly educated workforce, connections to international finance and trade, metropolitan atmosphere, and great weather as benefits to their companies. However, some economists fear that rising taxes will discourage new businesses in California and cause established one to flee to less taxing states. California’s left-wing government argues that a sound social welfare safety net makes the economy healthier as a whole.

A report done by SPUR, a non-profit research growth focused on the betterment of San Francisco, devised an interesting conclusion about the city’s payroll tax:

  • The San Francisco- bay area is famous for its biotech firms. However, none of these biotech firms actually settle within the San Francisco’s city lines reportedly due in part to the city’s payroll tax. The result is a loss of revenue and available employment. The state levies taxes on gasoline to prevent gasoline consumption yet San Francisco does not expect the same result when it levies taxes on payroll.

The current federal administration has prioritized job growth. Since the election job reports have been positive and show strong growth in the labor market. Unemployment has hit its lowest rate since 2001. Where are these jobs going? Certainly not San Francisco.

The city of San Francisco is a small-scale model for what could happen to the state of California. The state of California is able to tout a higher growth rate than the rest of the United States as well as positive job growth reports. Arguably, this growth is not coming from the private sector. In fact, in the month of May, California created 17,600 jobs but only a third were from the private sector. If we continue to see growth in industries such as manufacturing, it is plausible to assume it won’t be happening in California.

Assuming federal tax cuts take place, the private sector will become flushed with new capital. That paired with increased CEO confidence creates new investments. Manufacturers will likely choose areas with low taxes, low real estate prices, and a moderately educated workforce. The result could be large growth in metropolitan centers of the South and the Mid-West. Cities such as Jacksonville, Florida and Des Moines, Iowa provide large amounts of cheap real estate, low taxes, and an educated workforce. Currently, they are two of the fastest growing cities in the country.

Traditional economic theory dictates that governments should raise taxes in a spurred economy to prevent inflation and cut taxes in a lame economy in order to stimulate growth. However, this theory fails to take into account the vastness of the United States. In a spurred economy, companies have more capital and therefore a greater opportunity to reshore their operations in regions that offer less taxation, less regulation, and an overall lower cost of doing business.

Today, only local San Franciscan politicians and nonprofits are worried about the flight of businesses a few miles outside their city lines. State politicians should evaluate this and consider lowering or at the very least consider not raising any more taxes. As of right now, the California state congress is pushing through legislation that would create a single-payer healthcare system for the state. The taxes will be enormous on both individuals and businesses, upwards of 15%. California beware, your natural beauty may not be worth 40% tax on income…

 

Sources:

"RATE OF PAYROLL EXPENSE TAX." RATE OF PAYROLL EXPENSE TAX (§ 903.1.)-San Francisco Decoded-San Francisco Decoded. N.p., n.d. Web. 13 July 2017.

"Business Tax in San Francisco." SPUR. SPUR, n.d. Web. 13 July 2017.

Sharf, Samantha. "Full List: America's Fastest-Growing Cities 2017." Forbes. Forbes Magazine, 10 Feb. 2017. Web. 18 July 2017.

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