Empty offices mean SF could lose millions in tax revenue

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In its early days, the pandemic seemed like it could displace our way of life for a few weeks. But as weeks turned into months, and more, many workers realized that a return to the office was not on the horizon and began to cram desks into living spaces and bedrooms as evidence. that the virus had changed professional life – perhaps for good.

Over a year and a half later and many of us are still waiting to return to our offices. In COVID-aware San Francisco, things may never go back to the way they were before as businesses shrink their office space as more workers prefer to continue working from home. But while remote working has kept people safe, it is taking a toll on the city’s tax revenues – with losses that could run into the millions.

“The city’s tax base, which is our second-largest source of revenue after property taxes, is based in part on where people work,” said Ben Rosenfield, City of San Francisco comptroller. .

For many tech workers and other well-paid but still largely remote industries, this is not San Francisco.

For example, “We don’t tax all Google income at the San Francisco tax rate,” said Ted Egan, chief economist of San Francisco. Instead, some of that money generated in San Francisco is what is skimmed into city coffers. Although city voters have ratified the move from Proposition F to taxing businesses on their gross receipts instead of payrolls, determining how much of that income should go to the city still depends a great deal on part of who works where.

Companies pay a variety taxes to the city, including on their gross receipts. In fiscal year 2020-2021, this money represented more than $ 800 million in municipal revenue, or about 13.3% of the city’s general fund. The Mayor of London Breed signed a budget of $ 13.25 billion for the next fiscal year in July, as well as $ 12.75 billion for the following year.

The money goes into the general fund and is not earmarked for a specific department, although the city’s impending layoffs last year that were narrowly avoided have given some idea of ​​the impact of funding gaps on municipal services.

According to the Rosenfield office, the city’s top 100 companies as measured by gross revenue in San Francisco in 2020 reported a 14% drop from gross revenue in 2019. That was equivalent to a $ 7.9 billion drop. dollars reported on their tax returns and included a 13% drop in reported gross revenue in the city among information (tech) and financial services companies.

The controller’s office said the drop is likely due to telecommuting and they expect the same to be true once 2021, with remote working becoming more entrenched with the virus’ grip on the internet. company.

This could also be a problem since prop. F is considering business taxes on these two industries which to augment between 2020 and 2024. By 2024, under this measure, the city’s information industry is expected to pay $ 43 million more than in 2020, while the financial services sector will see its tax bill increase by $ 25 million over the same period.

With many offices still closed, it’s unclear whether all of this expected tax money will materialize in the city’s treasury. It is also not known exactly how many people work remotely for companies in San Francisco. About half of all jobs in San Francisco can be done remotely, according to a Bay Area Council study.

While some of that income is likely to decline, the city is also harvesting less money from other industries hardest hit by the pandemic. Retail trade, service businesses, manufacturing, arts, entertainment and recreation, accommodation and food services will benefit from tax cuts in 2021 and 2022 as a relief measure in the event of pandemic before their rates increase in 2023.

“2022, 2023, this is where it becomes more of a guessing game,” in terms of the business income the city will see, said Rosenfield, the city’s comptroller, adding that part of the answer will depend on the work. long term from major employers. provisions.

Egan said the city is likely to experience budget problems in the future, especially as federal interim funding will decline in the years to come.

“The city’s five-year financial plan envisions lingering fiscal problems as federal income support wears off,” he said. This included the loss of federal emergency money from the CARES Act and other federal funding that is expected to run into the hundreds of millions of dollars.

A report from the Rosenfield office at the start of the year said the city’s expected budget would hold a question mark and, “is closely linked to the recovery of sectors most affected by the pandemic: tourism, office and small industries companies. “

Whether teleworking, emigration, conventions and international travel pick up or remain depressed “will be of critical importance to the city’s tax base,” according to the report.

While some conferences and events are returning to the city, hotels are still largely vacant and well below the common 80% occupancy rate before the pandemic. It also causes the city to lose significant hotel tax revenue.

The comptroller’s office said that in fiscal year 2020-2021, total hotel tax revenue was $ 42.2 million, down 85% from the previous year and from nearly 90% compared to the previous record for fiscal year 2018-2019.

There are also other unknowns.

Data from the United States Postal Service showed that many people who left San Francisco during the pandemic moved elsewhere in the Bay Area. But, if they want to go back to the office, there won’t be as much space to come back as companies have offloaded expensive rents for large spaces in order to save money and integrate remote work. for real.

Yelp said earlier this month that it would cut its offices by about a third and did not anticipate the return of workers until next year. Salesforce and Twitter have already said they will never require most of their employees to be in one place again. And Facebook was initially considering a wider return to its offices, but has pulled out in recent months to allow employees to request permanent remote work as the delta variant spreads.

Even some startups no longer require employees to monitor kombucha taps in the office, and while tech vacancies in San Francisco have returned to pre-pandemic levels by some measures, the number of jobs that allow remote working on the rise, according to Egan data presented to city supervisors in September

There are some mitigating factors that could prevent the city from spreading too much red ink.

“The tech industry as a whole has had a huge 2020 year,” Egan said, noting that while the city might see less income due to remote working, “the size of the pie has grown.”

Egan said that while many tech companies have cut leases, high commercial real estate vacancy rates in the city could push prices down and allow other businesses and their employees to move in, strengthening the tax base.

In July, the city’s office vacancy rate rose to 20%, the highest level in nearly 20 years despite an increase in rental activity.

“Some of what we’ve lost from the home group work, we’ll take back from the new set of companies moving in,” Egan said.

Rosenfield, the controller, said it won’t be clear until early next year how much revenue the city has lost in 2021 due to remote working.

“As a whole, the city’s economy is made up of two key pillars,” he said. “One is the office industry in the city which is heavily concentrated in technology … the other is the hospitality industry.”

While the convulsions of the pandemic still trickle down to both, he said the only question left was how big its impact would be.

In the report his office produced in June, the Rosenfield office said the city’s budget assumes the ongoing economic recovery will result in annual tax revenue growth of around $ 250 million in the fiscal year. 2021-2022 and approximately $ 500 million in fiscal year 2022-2023.

But those projections assume that large-scale remote working will quickly fade over the next two fiscal years, a possibility that looks increasingly unlikely with each passing day.

Chase DiFeliciantonio is a writer for the San Francisco Chronicle. Email: chase.difelicantonio@sfchronicle.com Twitter: @ChaseDiFelice



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