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'CEO Tax' Would Hit Retail, Financial Services: Report

  • The San Francisco Controller's Office estimated that Prop L, a measure on the November ballot, would cost the City 615 jobs and $60 million in annual GDP

  • The proposal levy a tax on companies based on the ratio of the salary of the highest-paid employee and that of the median SF-based worker. Any business with a ratio greater than 100:1 is subject to the tax

  • If approved, revenue from the tax is expected to be highly volatile and to disproportionately impact the retail and finance sectors

Prop L, a San Francisco ballot measure that would increase taxes for companies with a wide pay disparity between top executives and the median SF-based worker, could have a net negative impact on the City's economy according to the SF Controller's Office.

In a report released Wednesday, the Controller estimated that the proposed tax would trigger a loss of 615 jobs and a $60 million decline in San Francisco's annual GDP. San Francisco's GDP was $183 billion in 2018.

Prop L would impose an additional business tax on companies operating in San Francisco that have a ratio greater than 100:1 between the highest-paid managerial employee and the median, locally-based worker. The tax rate increases alongside the pay ratio, and businesses in the highest ratio tier could pay up to 375% higher gross receipts taxes and 83% higher payroll taxes, according to the Controller.

San Francisco collects two primary forms of business taxes, based on gross receipts -- sales that occur within the city -- and payroll taxes, which are based on the number of San Francisco-based employees.

The Controller noted that the so-called "CEO Tax", if approved, would amount to a "highly volatile" revenue source because executive compensation is often grounded in stock performance, which can vary greatly year-to-year, and because it would rely on a very small base of companies.

Retail and financial services are expected to be disproportionately impacted, together accounting for roughly half of total estimated revenues. The Controller's Office earlier estimated that the tax could bring in between $60 million and $140 million annually, and the potential revenue is not earmarked for any specific purpose.

San Francisco's average wages vary widely by sector, ranging from $48,000 and $245,000 per year. Retail trade is among the lowest, with an average annual salary of just over $50,000 per year.

The tax could target companies like San Francisco-based Gap Inc., which had an executive pay gap of more than 3000:1, according to data compiled by Recode. Other possible targets include Wells Fargo, Williams-Sonoma and Salesforce.

The tax could have the effect of raising public sector jobs and payments to City contractors, the Controller's Office noted, but would increase the "already-wide difference in the cost of doing business in San Francisco" compared to other cities, triggering layoffs in the private sector.

"The loss of employment and spending will create negative multiplier effects in the city's economy, as fewer employees and residents will lead to reduced spending at other local businesses," wrote San Francisco's chief economist Ted Egan in the report. The estimated 615 job cuts would span the economy, but be especially concentrated in retail, financial services and accommodations.

Owing to the COVID-19 crisis, San Francisco is facing a budget deficit of roughly $1.5 billion in fiscal 2020-2021, according to current projections.


Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup

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