their economic transition. so, it would not be in any way equitable to charge the flat gross receipts tax. we are particularly mindful of businesses with relatively low payroll but sell a lot of products. including personal services. these are the industries with the lowest gross receipts rates. it is taxed at 0.75%, moving to 0.175%, in excess of $25 million. that business will pay at all four tiers. supervisor chu: if you have a business with gross receipts levels, do they pay on the first $7 million? so that it is progressive? >> yes, it is progressive in

that way. scheduled the information industry, by a technology, clean technology, including services. their rates start at 1.25% and rise. scheduled to is the lease information, the accommodation, and arts and recreations that are not nonprofit. their rates start at 0.3% up to $1 million, and 5.4%, $25 million and above. there are slight differences indicated between the proposals on the rates for schedule 3. those are the only rate differences. schedule 4 is subject to tax.

they are not covered by the payroll and gross receipts tax and also administrative services, things like temporary and payroll services companies, janitorial companies, so forth. they rise above $25 million. this is the most payroll intensive sector of the economy. /rit is largely just paying pee to provide services. the switch for them from 1.5% payroll they can support higher gross receipts than some other industries, even though these are the highest gross receipts in any of the schedules. we project that all of these industries will pay less than on the payroll tax now. schedule 5 applies to construction industry only, 0.3%, from zero to a million,

and rises. the exclusion for subcontractors, the larger construction companies are paying a significantly higher tax. schedule 6 applies to financial- services and insurance. even though we cannot tax banks or insurers, there are many businesses in the financial services that fall under the tax. also, professional sciences, these start at 0.4% of gross receipts for the first million dollars, and rise. that covers the six schedules. every private business in san francisco will fall into one of the schedules. the nexs q how do we get to that amount of gross receipts that we pay supervisor kim: on the rates

that are being proposed, can you brought least speak to how you got to these numbers? >> to the sizes of the tears? supervisor kim: and also the rates. categories and five different schedules and have different rights that are being applied at different tiers. i wanted to understand how you came about these levels. >> the most important incineration is the fact that industries are more labor or. intensive generally sustain a higher rate than ones that are more capital insensitivintensivn falls,xv[dp selling things with relatively few people. we did not try to set these rates such that every industry would pay the same amount they do on the payroll tax. i will go into later how the distribution of the business tax payments unchanged from the

payroll receipts tax. the changes are not significant for most industries. there are fairly small changes, but they go to the job creation aspect of the gross receipts tax. part of the reason, and i will say the employment effects of the switch, a part of it comes from the fact you are no longer taxing payroll. it another part comes from the fact and how we have changed the industry tax payments. many of the industriesethb÷ that received a lower tax payment have the potential to create a lot of jobs because they have their taxes reduced. other industries getting more tax burden are relatively less sensitive in terms of their jobs creation. iwhile it may be a knock, the gain of the others more than makes up for.

every industry creates jobs which project as a result of the shift. it is true that industries that are more established in the city, that have been here longer, that tend to be very stable and established are not very responsive to local business taxes. they will be harmed less by a tax increase than other businesses that are struggling or newer to the city. that is part of the logic that went into the rates. another point is the progression is trying to introduce something that is not in the payroll tax now, but is part of many tax systems, reflecting the fact that small businesses in general have less ability to pay than large businesses. that is a feature of every one of the schedules, that the tax rate goes up with the amount of gross receipts. in terms of proportion, it is

not an issue if your small business that derives of its sales from san francisco san francisco gross receipts, unless there is an exclusion that applies. but there are many businesses that may be branches of a national or global business or doing business in the city and outside of the city, and we have different rules that apply to different industries that are keeping in the practice in many of the cities around the state. essentially, there is a set of industries that proportion their gross receipts on where their cost of performing the service is, as measured by their payroll expense, and that is the service industries. there is a set portion on where their property is if there are in the business of leasing property. that is real estate and hotels. there is a set of businesses that sell tangible or intangible properties, with a manufacturing or information or wholesale trade, and they use an

apportionment method. both reflects their expense in making it and also whether customer is. 7 lv÷that mixture of considering customer factors and production cost factors is a common feature of the apportionment system. but we also have rules for multiple business activities. if you have manufacturing and retailing, professional services, a different kind of service. thegwçú legislation requires yo break out and pay the rate for different types of activities, unless one of them accounts for 80%, in which case you just pay the rate for the biggest one. there is a category of establishment and san francisco that we're calling administrative offices that are being exempted from the gross receipts tax. the legislation keeps them in the payroll tax at a rate of 1.5%. these types of businesses are

involved in administering other offices of the same establishment. for example, corporate headquarters would be an example. they're not directly caring gross receipts, but they're managing people within the same company. the problem that establishments like this create is it is hard to say how much of a worldwide corp.'s burress receipts is apportioned to their headquarters. they're not selling things or making things. many of these companies, some of the largest businesses in san francisco, and if a way of apportioning receipts is not precise, you could be in a situation where they're being vastly more or vastly less than what they're paying now. as we developed the legislation, that was not a risk we wanted to take because they represent very large payers. as we had discussions with them, some of them were paying a lot more in gross receipts, some

were paying significantly less. ithe solution was it has to have a majority of the san francisco payroll associated with administrative and management services. it also has to have a certain size and a certain number of employees to ensure this is administrative offices of large companies, and these businesses are basically not touched by the business tax requirement. the legislation has them at the same rate, 1.5%. the pahase-in, ther4epdq:e is ba phase-in and phase-out. when the voters approved the rates, those are the maximums the city could possibly charge. at the planet is in 2014 that would be the first year that we

charge the gross receipts tax and we would charge to% of those rates. that would rise to 25% of those rates, then 50, 75, and we would charge the maximum rate of one half% in 2018. based on how much we collect each of those years, we're going to reduce the payroll tax to basically return to the gross receipts gain to taxpayers and the form of a payroll tax reduction. if we are underestimating the gross receipts, is the revenue comes in much larger than expected, we could reduce the payroll tax to zero during the phase-in. there is a possibility that the gross receipts tax could come in below expectations.

while we would reduce the payroll tax and subsequent years, we would still be left with a small payroll tax. we kind of need to disclose that risk. we believe this is a financial risk for the city. it is an administrative headache. we have tried to set the rates they could be retired but we cannot say that for sure. i mentioned earlier the city has a number of exclusions for biotechnology it would convert to a tax credit to apply to gross receipts.

all of those have an expiration. the central market exclusion is different. it would convert to one in which affected businesses combined tax payments, in other words the payroll tax and receipts tax would never exceed their base year level. finally, the pre-ip [o stock compensation has not changed. it does not form part of the gross receipts tax.

the only significant difference between the two, they start with a $75 fee for the mayor and the president's legislation. supervisor avalos' legislation rises to 100,000 for businesses with over a 1 million in grosgm receipts. we have modeled the likely impact of this. i apologize for trying to read this on television. this pie chart shows the distribution of the payroll tax payment now and the best projection of how businesses would pay the payroll tax, the gross receipts tax in the event the switch was made. the administrative offices are not excluded from either chart to aid to the comparison.

the biggest sector of the tax base is the professional services industry. it would remain at essentially 31% of the gross receipts tax. its savings would be fairly small. the financial industries pay about 23% of our payroll tax. they would pay 28% or increased amount of the gross receipts tax. the trade and transportation industries, including a wholesale trades, would see their tax rise from 13% to 15% of the total. that is mainly in the wholesale sector, both retail and transportation would go down slightly. those of the only sectors to payments really increase. -- those two are the only sectors whose payments really increase.

the hospitality industry would fall from 6% to 4% of the total. other services would stay the same. a construction and manufacturing would fall. the information sector would fall from a% to 6%. to speak to the economic impact of this, there are four factors that play in the switch from course receipts. reducing the payroll expense tax reduces the cost of labor for the businesses that are affected by it, creating an economic incentive to expand economic activity. on the other hand, the gross receipts tax adds to business lanet, but everything, creating an incentive to reduce all

expenses. that's which is both good and it also has a negative impact. by the same token, it is good for the economy. the city is the largest employer, a major source of multiplier effects for the city's economy. on the other hand, the increase in the business registration fees deals like an increase the gross receipts tax to businesses and has a similar constructing a fact. the net economic impact depends on the strength of these individual positive and negative economic impacts. we project the impact overall would beuwçnñ positive over 20 s for the mayor's proposal. !t]vç+i would be created by this on average over the next 20 years. 1905 private-sector, and about

150 government jobs. the positive economic impact of eliminating the payroll tax, and that are simulation it fully phases out and the gross receipts tax almost completely phases out, the positive effects of eliminating the payroll tax is significantly outweighs the negative effects of the gross receipts tax, even including the higher business registration fees of $13 million. when we break down the private sector employment impact, every sector of the san francisco economy, these are the sectors i showed on the pie chart, add employment, even the ones with increased tax payments. even though the tax payment goes up, they benefit by not paying the payroll tax or the gross receipts tax, viewed by the 2 jobs will be created, it is not

surprisingly large sectors of the economy, which is the professional services sector, hospitality, and also the financial services industry. supervisorvç+$j kim: with this analysis on page 31, you are showing the level of job you expect to be created by industry sectors. these :dñ are excluding naturl growth in the economy. >> that is right. over the next 20 years, we are expecting significantly more employment. this would be attributable to the legislation. on a percentage:vg1 basis, the- gaining industries are different. other services is actually the sector that on a percentage basis has the most jobs. also, hospitality and information at a lot of jobs. this is the overall economic

impact assessment of supervisor avalos version. that also creates a significant number of private and public sector jobs. =úz. with the other legislation in this version, every sector of the economy experiences job gain over 20 years, notwithstanding the higher business registratio fees. it just to summarize economic stability and economic terms why this could be expected to be beneficial, the current payroll tax discourages job creation. it is actually one of the fastest-growing overtim time. that means it is a growing

burden. it also, the industry burden is arbitrary. the city has never made a policy decision that gets us to the pie chart that i should be for of who pays the business taxes now. we have arrived at that as the result of a lawsuit and 2001, which change to pay the tax. by moving to the gross receipts alternative, we shift the tax burden away from the labor cost. it is likely this will not grow as fast or be as big of a9 on the economy, and it also gives an opportunity to adjust the industry in ways that further promote job creation. i mentioned the stability issue, that payroll tax has been less stable. given that fluctuations, it is highly unstable. the gross receipts is not based on that and is likely to be more stable. if we adopt this, we would be moving from a situation where less than 10% of the businesses. the tax to a situation where

slightly less than one-third of the businesses would pay the tax on some level. we would be moving to a situation where businesses with less than a million would be exempt. and a final minor know that many people may not be aware of, we are prohibited by law from taxing businesses in the city because we have a payroll tax. federal law would allowd apply a gross receipts tax against businesses, and it would be part of this, generating a small amount of additional revenue. that concludes our report and i would be happy to take any questionsta=2. supervisor kim: thank you very much for the presentation. supervisor avalos? supervisor avalos: 6d(8wthank yr

your tremendous work on these measures over the past couple i know that we first talked about this after the 2009 budget. ithere is a lot of work you have done on that, your staff working with you. i appreciate all of that. it just to reiterate the major differences that we see in terms of jobs, between the mayor's measure, could you reiterate that? >> what we are projecting what the mayors legislation is an average increase of 2050 jobs over 20 years. 1905 private, 150 government. but your proposal, it is 1765 jobs, 1555 private, to 10

government. -- 210 government. supervisor avalos: thank you. i appreciate that. puc that as a significant difference? -- do you see that as a significant difference? >> it is in the eye of the beholder. ordinarily, we would see something that affected jobs in the thousands as a significant economic impact either way. i would say both of these pieces of legislation have a significant economic benefit. supervisor avalos: i think what is interesting for me is having worked with you when your reports on other tax measures in the past, a number that trends up or down really indicates overall where the trend is going

to be, a positive impact. there are interpretations that you can make about the difference between the maersk version and mine. i think what is significant is we have a number well above 1000 for each, showing a positive impact. overall, this is something i have been working on since i first got interested in doing this back in 2004, when there was an attempt to recreate the gross receipts tax that failed. the discussion then was we had to move toward this type of taxation because the payroll tax is the burden on businesses and kept them from wanting to bring on new hires. i took that to heart. the work that you have been doing and i have been doing has replaced the payroll tax. the fact we're moving in this direction, we have to measures moving into one is very

positive. >> ok. supervisor kim: thank you, supervisor avalos. that is a good way of answering that question, ted. >> thank you. supervisor kim: i know there are moving pieces. we clearly have versions and differences in opinion on where we go with that. can you summarize where there may be moving pieces or outstanding issues on the measures? >> the comptroller is sort of closer to the movies pieces that i am. if he is free to speak to that, perhaps he would be better. supervisor kim: to the comptroller, what are some of the outstanding issues that remain to be resolved if they should go to the ballot? >> certainly, supervisor. on behalf of the sponsors and

the mayor and the board would continue to receive feedback from affected taxpayers and work through those issues as relevant ones are brought to our attention. i think we have continued to hear about impact on schedule one paris, retailers and wholesalers, currently in both the maersk version and supervisor avalos' version. the registration fees, frankly, are flat dollar values. we acknowledge in the underlying 8i;nzrates that the economics of different industries are different, and we had a lap by assigning different rates to a retailer that a law firm. -- then a law firm. we continue to receive feedback about the registration fees in particular, that does not feel equitable across business types. we're working on alternatives for your consideration.

we have heard feedback similarly that the different tiers for retailers and wholesalers, which are equivalent in dollar value to those on the other schedules, i do not acknowledge a difference in someone that is buying and reselling things, as they typically have lower labor costs, that using the same dollar value for the progressive nature of the rights, again, as you do with someone that is much more labor-intensive, this is a tp'd rates. tp'd we continue to look at schedule one structure and its impacts. schedule one is a broad set of companies, from small neighborhood retailers to larger wholesalers, some of the largest retailers in the2]:q city to sf the industries i see represented here. ii think everyone continues to

hear one of the sharpest increases when compared to their current tax burden is for real- estate, generally. an industry and the old growth receipts system that were payers. when that was repealed 12 years ago, effectively the real-estate industry saw a reduction in their ratesul but the rate that was in place before was higher than the rate that we have recommended in both versions. i think we, like you, have heard from both residential and commercial real-estate companies that is proposed is sharp. i think that is very much a policy called for the mayor as we close this. i think that is at