business community and our city comptroller, economist spent staff, who have done incredible labour to move us forward over the last six months. i wanted to vermont -- remind everyone that we are closer than ever to coming together in a once in a decade had a proposal to hopefully create jobs and generally looked at revenues. i know that as someone who has been working on this since to them as sex, i think that this is my fourth cycle considering business tax reform. this is something we have all known for a very long time needs to happen. hopefully we are in the final days and hours are coming to a resolution on this, to remember that. there are two issues that i know that are moving around in little bit. the first is making sure that we are adjusting their rates to

make sure that there are no windfall winners or losers in the business community. all of the recent weeks and proposals are ones that i would support and i hope that we can get to final resolution. i know that there are a couple of outstanding questions that are very close. the other side is revenue. the proposal that we have put forth calls for an additional $13 million in revenue. supervisor avalos is calling for an additional $14 million in revenue. this is on top of $400 million that we have. 3%between our proposals are quie small. based on conversations i have had from folks concerned about revenues, if you are actually looking at the differences, they are literally less than 1% of the entire total we are talking about. what i hope folks recognize and understand is not to let the perfect be the enemy of the

very, very good. we all understand the risks of what happens if we do not move forward on something that represents real consensus. i think that we know that all the work we have done for the last six months, the work we have done for the last 10 years, it may not come to fruition. i hope you can bring this to a good consensus closed. >> thank you. given no additional -- supervisor chu: thank you. given no additional comments, i would like to turn this over. supervisor chu: it will come on. >> thank you. this morning be issued an economic impact report on the two gross proceeds measures.

i would like to walk you through some of the highlights of the book or at this time. as many people know, the city and its payroll expense tax has been a controversial subject for many years. the comptroller's office has been working on an alternative since last fall. both of the measures before you are derived from a report be prepared for the business community on may 10. the two proposals are virtually identical except for the fact that they raise different amounts of revenue from our business registration fees. the mayor and the president's legislation would raise $13 million. as many people may know, the city in the past had a hybrid rose receipts payroll tax for businesses calculated both and

took whichever was greater. a similar system was declared unconstitutional in los angeles, leaving the city to abandon that tax, reducing the city's revenue from the gross receipts side in 2001. the city also issued approximately $7 million in bonds to cover settlement costs at that time. there have been subsequent efforts to change the business tax at the ballot that were both unsuccessful. since that time, the city has tweaked or made changes to the payroll tax in a number of ways, introducing biotechnology and clean technology. in 2011 there was an exclusion for the central market area. the payroll tax, as many people know, is the second-largest source of general fund revenue in the most recent fiscal year.

the payroll tax as a tax has been criticized on three primary grounds. there have been a number of studies over the past 10 years, from the comptroller's office and others proceeding as suggesting that the economic impact of the gross receipts tax, including the chamber. the payroll tax has been highly unstable as a revenue source. we have had several years with 10% growth in annual revenue with 10% declines not expect. it appears to be a very volatile source, significant and more volatile to the number of businesses and employment in the city. the payroll tax has also been criticized on equity grounds for a number of direct -- dimensions. it is true that less than 10% of registered businesses in the

city now pay the payroll tax. there were 7500 out of 96,000 registered businesses. many do not pay the tax because they are sole proprietors, which the city does not consider payroll, regardless of how much they bring in. several businesses, about 30,000, are exempt. i mentioned the other8 that the city has added, including constitutional exemptions for banks, insurers, and certain trucking companies. the net effect takes into account the situation where less than 10% of these businesses pay the tax. san francisco is the only city in california bases its entire revenue on this tax. to the extent that it creates issues are around economic impact, equity, instability, we

are the only city and state to experience that. f?2 large cities in the state in california, and the gross receipts tax is one of the largest. it was on this basis that the comptroller's office recommended in its report the replacement of the payroll expense tax with a gross receipts tax. both were ordinance to receive the report before you for key features of that report. i would like to go over those key details in the features of both proposals. they are essentially the same. i will be talking about the exclusions for the tax, small businesses and how they are treated, the question of apportionment, an issue that comes up for businesses in san francisco.

we have rules aboutí-e how multe business activities are handled. there is a category of establishment in san francisco that the legislation calls administrative offices treated differently, not subject to the gross receipts tax. i will talk about that. an important part of the proposals stems from the fact that the city has not charged one of these taxes in 10 years. what it means is that our ability to estimate the revenue that comes from the tax is hqej÷limited. for that reason, to ensure the city against risk in moving from a tax that we understand to one that we are not able to estimate, we have designed to process in what was stated over five years, but only to the extent that the gross receipts tax is replaced by revenue, insuring that the tax switch is revenue neutral and all the new

revenue -- revenue proposals will come from higher business registration fees. we can also talk briefly about exclusions that i alluded to before, and finally the cancellation of the existing fees. supervisor chu:re? tc bit about the key features of the ordinances. -- ordinances', one of the areas you speak about, it was intended to recalibrate to make sure that we are not collecting more than we thought we would, basically? >> correct. >> i want to be clear, when we talk about phasing this in and out for these entities, where you are saying the entirety, there will be businesses that will be paying more? paying less? what you're saying is the business in the entirety.

there could be businesses that pay more, others that pay less in these scenarios? >> correct. it would be virtually impossible to have all businesses pay the same. most will not pay vastly more or less, but you are right, the process is designed to make sure that the city as a whole is not collecting more or less revenue than we already are. >> i wanted to make sure that that point was made clear to the members of the public. >> in terms of gross receipts, we have certain exclusions that are comment and found in other cities, that is where we got many of the ideas. when a financial services company sells $100 million in stock, it is, not to charge the tax except for the peace that they make a profit on. we have had some feedback from

the construction industry that said if you charged every construction company the same -- well, if you did not -- if you're legislation did not account the fact that there are general contractors and subcontractors, you have a situation where they would pay vastly more than the subcontractors. we have allowed exclusions for general contractors and the effect of that has been done at the same time, raising the rate on a larger construction companies in a way that we think all the companies will be taxed on the work they actually do and the larger companies will still beó when i touch on the rates later, you will see that one of the features of this proposal is that these rates are largely progressive. basically, the larger the business within the schedule, the higher the tax rate they

will pay, but that only kicks in at the upper tier of revenue. like most sections of the economy, we charge our gross real estate. we heard feedback from owners of rent-controlled housing, they have less of an ability to tax their tenants. whereas the owners of market rate housing to have that ability to account for the different regulations that apply to those different kinds of housing. it allows for rent-controlled housing loesser's to exclude 50% of their receipts. finally, receipts from the sale of real-estate are also included. this is something we have seen in other cities as well. i mentioned earlier that the city currently has a $250,000 exclusion for small businesses. if they have less, they do not pay the payroll tax. the gross receipts tax is a similar concept.

a business with less than $1 million is exempt from the gross receipts tax. we have had a slight tweak for that. for them you are exempt if you have less than four units. even if your gross receipts are less than $1 million. but current exclusion for nonprofits, the businesses that state constitutions prohibit, those will continue to apply. we cannot change that. the gross receipts, we clark -- currently have a flat payroll tax that applies to every business. businesses are veryd@ry differen 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. same. a construction and manufacturing a construction and manufacturing