could look at. it makes sense that you know, of a health department would have a program similar to that. and could be funded by this. that wasn't what the nexus study had -- had measured. but it is something that we could look at as a function of the city as a new service. >> as well as tying it directly to this, i don't think we'll be able to do that based on the nexus study. >> okay. thank you. all right. thanks. i think we heard from everybody. ed public comment and the commissioners. looks like supervisor avalos, some work to do. and so, should we gather all of the suggestions and forward to your office? >> that book great. i appreciate your time and patience to hear this and your openness to hear about it as well. i hope that you could keep an open mind as we go through the

legislative process here at city hall. this won't be in committee on the 28. we won't get it heard until we get back from our break, the board has a break in august. it'll be in september. thank you so much. >> thank you. next item, please. >> commissioners, item number six. update, discussion and possible action on proposed motion 10 a756 establishing a progressive payroll tax rate structure and reducing expense tax rates and imposing a grows receipts tax on the rental of commercial property. this is for a motion ordering submitted to the voters and an ordinance resizing the payroll expense tax to establish a progressive tax rate structure and reducing expense tax rates and imposing a gross receipts

rates. afterelection to be held on november 2nd, 2010. we have a presentation today by the legislative aide to supervisor david chiu. >> good evening commissionersion and director. and juddson true, legislative aide to supervisor david chiu. very -- very happy to be here tonight before you. for the second time on this item, chiu appreciated the discussion moonk the commissioners and the recommendations of the comments from the public. the last time we were before you, sense that meeting there have been a couple of important developments i'll go over briefly and also ask the city's chief economist ted egan to make a more specific presentation on this measure. since the last time that the commission met, supervisor chiu has met with further -- further

with the members of the small business community and heard concerns similar to what we heard here at the in public comment. we also had a budget and finance committee meeting that occurred last friday, july 9th, and -- supervisor chiu made some amendments, specific amendments at that meeting, to respond to -- to -- at least in some part all of the concerns that have been raised by the small business community and the commission, specifically. ted eegen will go over those amendments as i said momentarily. i did want to make -- one brief overview and brief comment, i think that gets -- gets at one of the larger issues we have at stake here. that's whenever we talk about taxes or revenues or issue that is really get to -- to, get to the passion of politician and the heart of what people are trying to do, there's often more heat than light. one of the -- one of the opponents of the measure is circulating -- circulating you know, an e-mail about it. i want to use this as an example of the ways in which, there's

sometimes distortions going on in the debate. i think it is important to recognize that as we move forward both here at the commission and the board of supervisors level a potentially as we head interest the fall for -- for a campaign outside of the building. that's just, for example, there's -- there's an e-mail that is talking about economic recovery, assessed and put out by the building owners and managers association that specifically says, to e-mail the board about a variety of tax measures, it says david chiu is proposing a payroll tax and commercial rent tax. the payroll tax would punish businesses with a higher tax rate for employers making more than $85,000 a year and that would put another economic burden on small business. and delay economic recovery. the fact of the matter s i think as we discussed before this commission, what we're doing in fact is moving away from the job kill payroll tax. i think that the extent to which that message has not gotten through in the debay is a reflection more on the tendency

toward heat rather than light. i want to emphasize again. the amendments that we made in committee at the budget and finance committee moved away from the payroll tax more. and in fact, the average, net job creation of -- effect for every year, for the next 20 years. and so, i just wanted to raise that an as r an example of the k50eu7bd of rhetoric that comes into play, as we -- as we talk about the measures. >> may i ask a question? have -- have -- has the building owners and managers association been asked to -- to -- to correct that? >> it actually just came to my attention right before the meeting. di talk to the supervisor brief lei told them i would mention it. we're in conversations with boma and other members of the community. can i definitely say this will come up in conversations soon. we have to have a dialogue. >> it is factually inaccurate. >> it is unfortunate nall. the goal of moving away from the

payroll tax is shared by the business community and by elected officials had the building. and as well as of course the -- to some extent the comptrollerer's office when they played a role in the alternatives analysis. i think there's fair, this is fair discussions about whether the commercial represent tax is the right approach. we believe it is a good step. and to move away from the payroll tax but that -- the fact that we're, that less of the city's business tax revenue will come from the payroll tax is under this proposal is difficult to dispute. and so, i can certainly talk more about how the amendments respond to the commission's concerns after the presentation, and whenever you would like. so, with that, i would -- i'm happy to entertain questions now. it may be more fruitful to have the chief economist go through the amendments. >> thank you. >> good evening. ted egan.

my office has analyzed the amendments that supervisor chiu introduced at committee last friday. and i like to go through with you our findings regarding their fiscal and economic impact. there are five specific amendments and i'll go through them in detail. in general what the amendments do is -- lower the rent tax, lower the payroll tax further, and lower -- reduce the amount of revenue gained for the city and increase the jobs impact, including from the private sect, which is if keeping with the direction this commission gave two weeks ago. let me go through it in detail. on a topline basis the the commercial rent tax increased. however, there is a new commercial tenant scomplugs to the tax which allows land loords to remove from the taxable total the rent paid by any tenant that

pays less than $65,000 a year. if you pay $5,000 or something in rent, the rent you pay to your landlord, your landlord doesn't pay tax on. that effectively lowers the payroll tax rate to 11.5e% and it excludes businesses from getting rent pass through. as you know in our offices, original proposal, we -- we were attracted by the commercial rent tax, precisely because the fact that -- that commercial property owners have basically every business in the city as their customer allows them to share the tax burden across every business that rents in the city. the supervisor has elected to restrict that base broadening feature of the proposal. by including this exemption which as i'll say in a few moments exempts the vast majority of all businesses in the city from the rent tak pass through.

and a third feature is that the standard payroll expense tax credit which was originalably a 1500 dollar deduction from every payroll taxpayer's payroll tax, that's been reduced to $750. and the small commercial landlord exclusion has been eliminated, essentially the tenant clusion is replacing the landlord exclusion. and the supervisor has changed the allocation of the tax revenue to the general fund versus going to reduce the payroll tax to have a greater percent going to reduce the payroll tax. essentially this is used to raise originally -- originally it would raise $34 million. that number goes down to $28 million. it is a bigger decrease of the payroll tax. is that clear? >> it is clear. >> it is. it is -- it is a -- assessing our current tax -- i'm sorry, our -- our current stock of rental, commercial rentals.

is that right. if we increased commercial rental is this -- is this included? >> commercial office space. absolutely- >> this is on a static amount of the current -- the current commercial stock? >> yes, although the vacancy rate is quite high right now because of the recession. and when that comes back, although this is not a factor in the models, when that vacancy rate comes back to something more normal, that will increase the base of rent paying businesses and that will increase the rent revenue. to really increase it, we would have to build more commercial real estate. >> okay. and in your analysis and the economic health of the city, what are you seeing for the next 12, six or 12 or 18 months out in -- in our -- >> our analysis is always figuring this from the current proposal, so different recoveries are not really affecting the impact of the policy. the same recovery would grow our original payroll tax base.

and so we're not getting into a situation of what if rent recovers faxer than payroll or anything like that? we're sort of taking a static picture of both of them and say, over the next five years, how would they, how would they, they play out differently under the two proposal. >> okay. let me summarize it. there's an increase in the topline of the rent tax to 1.995. but the new exclusion which we believe covers 12% of all of the rent, tax base in the city lowers the effective rate. to 1.75%. more of the tax goes to reducing the payroll tax, less goes to the general fund. then the tax credit is reduced -- reduced and the commercial landlord is excluded. what this chart shows is really the impact of different, where does the 65 thousand come from? why did you pick 65,000 as a -- as a -- an exclusion level for the tenets. cha this shows is different

potential cutoffs we could have chosen or the supervisor could have chose enfor the for the exclusion. if we picked 30,000 oh, we would get 30% of the businesses and 0e% would still be facing a rent pass through. if we picked a bigger exclusion like say, a million dollars in rent, you would be getting more businesses but you would also give up a lot of, more of the represent tax. at the 65,000 number that was exhosen, we're excluded 74% of all businesses. we, we estimate that 74% of businesses in san francisco pay less than 65,000 dollars a year in rent. their landlords won't be taxed on the rent and there's no reason to expect they'll r-they'll get a rent pats through. as consequence the green bar shows the percentage of the rent tax that is lost with that exclusion. we estimate that tock 12%.

then finally reran the jobs impact of the verse. because it diverts more money of the revenue gain toward reducing the payroll tax, it -- essentially lowers the payroll tax rate on the lower bracket. on payroll below 85,000. to 1.25. 1.24 from 1.3.

that tends to create jobs. so, the impacts here -- the last time 1k down to 20, 0 jobs.

in the later years after 2020, it is above 200 jobs, 300 jobs.

that's for the next 20 years. >> annually. >> right. that means if you look at the economy 10 years from now, it would have 20 more jobs than with the current proposal. >> the people that are not familiar, you put annually in here. i can't assume it. >> i'm sorry. >> 120 jobs over 20 years. >> no. that's not yite. >> we would need a glass of whiskey after that. >> we won't afford one. >> and hooking the numbers to multiply 120 times 20. and then you're creating thousands of jobs. we like to present things as an annual average. >> that's better. >> okay. thanks. >> anticipate other -- any other -- >> okay. so, mr. egan, the -- the -- since this changed to a tenant exclusion, that moans an office -- an office manager, an office building manager can -- all

tenants that pay less than that for office space are excluded. that -- that manager or orche of the building won't pay tax on the tenants. is that correct? >> thearkt. when a commercial property owner is figuring out their tax liability, they'll look at the total amount of revenue, of rent they geet get from each tenant. every one of their tenants that pays less than $65,000 a year is exempted from the amount they have to pay tax on. if you're a small commercial landlord for example who has five tenants, all of whom pay less than $75,000, you don't pay any tax. >> mr. todd? from the mayor's office, also wanted to present. so shall we hold our questions until that time? thank you. >> thank you. todd from the office of economic work force development. i wanted to do two things today. first on behalf of the mayor, i wanted to say the mayor complaints to be opposed to this proposal. i wanted to submit for your

consideration, w.d.'s skerpg this proposal. i want to begin by saying, we appreciate the efforts of amendmenting the proposal. we want the amendments to not -- they don't solve concerns raised by the commissioners and as well as those by the public in the last hearing. first, the small employer tenant exclusion. we're concerned that many small businesses won't be -- won't be helped by the provision. this would be a segment of small businesses too big for the -- for the small tenant exclusion. yet we'll still be affected by the commercial rent tax. you can -- the cut-off is dling 65,000 am -- oat the cut-off is 65,000. and that's 416 of rent. you could look pack to the performance that the comptroller's office did in the last report.

every single of one of the performance, with the keppings of the small design, pays rent. and the hardware store has $225,000 in rent. the restaurant pays $it 50,000 in rent. and the wholesaler pays $ 50,000 in represent. those businesses under -- under this proceeds pro posal wouldn't take advantage of the rent exemption. and small businesss in high rent areas would be adversely affected by this. there are small business that is are lorkted in areas that -- that have high rents, with the exception. we motte most notable xm pell being union square. the rents are $420 per square foot on an annual basis. so, there could be small businesses located in the areas. and that aren't big businesses. they just happen to be in the high rent areas. that wouldn't qualify for this

exclusion as well. another example is polk, which is $48 per square foot. if you work away from the $5e cap on the exclusion and you know your rent is $48 a foot on annual basis any small business above 100 square feet wouldn't qualify for this exclusion. this are some that do but there are others that don't. additionally, i wanted to point out that -- that we're concerned with the commercial rent tax and the exclusion would affect different industries and in different ways. depending on how much lapped and -- space they utilize. i think industrial is a good example. commercial rent, industrial represents 0 about 85 cents per square foot in the southeast sector. and if you work back ward from the $65,000 cap, that means an industrial business of $6 -- 6300 square feet would fall

under. if you're above that, you would not qualify for the exclusion and would be paying the exherble represent tax. what that means is that because industrial has -- has a lot more space needed and probably lower employee utilization for the space, maybe 10, 15, 20 em employees for the space. it is noted industrial businesses have a different business model. they may be reaching, we have heard from the business -- from the industrial, the industrial businesses that you're reaching at that point 10 to 25 employees and you're probably reaching an inflection point as the business continues to grow. the question will come infor them whether they want to grow in san francisco or other places. we're concerned that this may be another reason for them to consider another location. and lastly, we have talked about nonprofits, based on nonprofits, look generally the ones that have an office requirement and locate an office space have to compete for the space. that means they're paying -- commercial office rents, and

noncommercial business district, noncentral business district represents. it is safe to assume most prefer not to be there. rents in those, for that space is about $250 a square foot. the -- the second piece is that -- the requirements for for many nonprofit the are relative high. and the report is that the requirements they see in nonprofits, that's social services and health services and others, and education, the standard requirement, average is 8,000 square feet. if you do the math, that's about -- 8,000 square feet at $250. that's 241,000 dollars in rent on an annual basis. they wouldn't qualify for the -- for the exclusion. the second major area of concern is related to competitiveness and this is a point that -- that i raised in the last hearing, it is a concern around the fact that -- that this is --

businesss in san francisco will now, have to pay as many would be -- would pay a commercial rent tax. in addition to -- to -- in addition to the progressive payroll tax. and -- this would be -- this would be contrast and compared to city the where they have to pay in either of those taxes. a point that i highlighted last time, where -- competing constantly against other cities to recruit, retain as well as help small businesses and new businesses start here in san francisco. we're concerned about the effect that may have. this would be in addition to other unique costs of doing costs in the city, in addition to fees and the utility user tax as well as other costs that are needed for doing business here in san francisco. thirdly, is -- third area is general concern is related to jobs. we continue to believe that jobs should be the priority. this proposal still results in private sector job loss until 2016. the com paroler said the proposal would on average create 14 jobs on an annual basis,

average annual basis. given the fact that the unemployment rate in may was 9.2%, with 146,000 unployed our concern is that may not be enough. if we change our tax structure, we should change it in a way that focus on job creation, rather than revenue creation. it is important 0 to point out that timing matters. the jobs appear to which there will be job losses, and -- is going to be during the earliest, early stages of phase in here. that's until 2016, during the recessionry time period, as well during hopefully the time in which the economic recovery is occurring. >> fourthly, i wanted to underscore, this proposal raises revenue through a new tax on businesses. there may be businesses, specifically small businesses that are exempt or excluded from having to pay the commercial rent tax. many businesses won't. and as you all foe, it is --

there's a -- an effect here. many suppliers and many customers, many of your partners may have to pay the commercial rent tax if they're bigger. and certainly if you're in the services industry, many of your -- your customers may be employees of larger businesses. as you know, there's a -- an effect to taxes on businesses which thises. and finally, just a question about administrativeability and clarity. in the original report, one of the criteria for evaluating payroll tax reform was the ease of administrativeness and clarity. i guess one question that we would have for the comptroller's office is how they view this proposal in its current form stacking up to the criteria. so just quickly to summarize, there's a concern -- concerns revolve around porky &s, first that we're concerned many small businesses and nonprofits won't

be able to take advantage of the small tenant exclusion. second, that -- that the city's -- the city will be less competitive when compared to other 0 locations that don't have a payroll tax or a commercial rent tax. thirdly that job creation should be the priority and this results of job losses until 2016 and just underscore this proposal raises new revenue through tax -- through tax on business during a recession. we're concerned about the city's ability to -- to compete and succeed, recruit, grow and expand businesses here in san francisco. i'm happy to answer questions that you have. >> if the two of you have something. >> thank you so much. again commissioners, and jeb true. i want to spend a lot of time responding to that detailed and appreciated analysis from the man from the mayor's office, but i wanted to make a few brief points. that's that we definitely agree

and -- came to agree through the process that we wanted to find a way to -- to go ahead and protect the vast mabble or the of small businesses in san francisco who would potentially see a pass through in the commercial rent tax, in part because of the recession and in part because of the strong feedback we heard at the commission and the meetings after that. and the amendments would do exactly that. that's -- the comptroller, the chief economist, provided the information on about 75%, almost, three quarters of the small business, or businesses period would not likely -- pay any additional commercial rent because of these amendments. we think that's important. in fact although mr. regan didn't go over it. the same is more true of nonprofits. according to the calculations about 84% of nonx

first couple of years as we shift away from the payroll tax toward, more toward the commercial rent tax. the vast majority of -- of the years would see, private sector job growth and every year would see net job growth, job protection and also -- also would see -- would see tremendous benefits in other ways through the -- let's face it, the revenue that would come into the city would be used to both protect jobs and provide crucial services that people need during a recession and -- in particular. i don't want to lose sight of that fact either. i think that -- i think miss rufo fell victim to the same discussion that is going on around this proposal. that's focusing on -- ol