San Francisco Proposition C: Gross Receipts Taxes Are a Poor Way to Fight Homelessness

Finding ways to help out the homeless is a noble goal, especially given how vital housing is for having a quality of life beyond mere survival. The causes of homelessness are complex, but at the same time, we should not stop finding ways to help alleviate the plight. The City of San Francisco has found a way to help with its homeless problem through a ballot initiative called Proposition C. If ratified, what Proposition C will do is enact a 0.5 percent gross receipts tax on all businesses with a revenue over $50 million. The intent of this goal is to fund homelessness programs in the City (e.g., housing, temporary shelters, mental health care, eviction prevention) so that other sources of tax revenue carry less of the burden. What could possibly be wrong with such a Proposition?

First, let's briefly get into what a gross receipts tax is and how it works. A gross receipts tax is a excise tax excised on all of its income, whether it its wages, capital gains, dividends, bonuses, or other sources. This is in contrast with net income, which is the the amount after deduction, adjustments, and credits are applied to the gross income. In short, the gross receipts provides an opportunity for more income to be taxed, which seems to be the proponents' thought process. The City and County of San Francisco's economic analysis of Proposition C estimates that it would bring in $250-300 million of extra revenue annually. The tax targets the "super-rich" only. It provides another stream of revenue to help an ongoing problem. Sounds like a win-win, right? Not so fast.

While these larger companies are levied for the tax, that does not mean they are the ones bearing the cost. Or in economic terms, where is the tax incidence? The truth is that many businesses are not going to be happy about the tax increase, and will find a way to pass on the burden of the cost. This phenomenon is hardly unique to the gross receipts tax. It can be observed with the corporate tax and payroll tax, amongst others.

One possible reaction of businesses is to reduce work-hours or to cut jobs all together. Remember that economic analysis from the City of San Francisco? It estimates that it would cost the city 725 to 825 jobs annually, or 0.1 percent of overall jobs. Why? Because the cost of labor just would increase substantially. As of now, these businesses pay an average of $2,500 per employee in business taxes. If Proposition C passes, that cost would increase to $3,700 per employee per year (see below).

Source: City of San Francisco, p. 19

If the cost of labor becomes that burdensome, it could potentially lead to firm relocation. The City did not include that in its direct analysis. Nevertheless, it did acknowledge that firm relocation would have a more significant negative impact on the City's economy. Plus, it would not be the first time in economic history that a firm relocates because of cost of labor issues.

Another possible reaction is shifting the tax burden over to the consumer in the form of higher prices. Using Texas as an example, if the gross receipts tax had not been implemented in Texas, the State would had increased its collective disposable income from $30.5 billion to $40.3 billion between 2006 and 2013.

Other Issues with the Gross Receipts Tax

• There is also an anticipated loss of $200-240 million of GDP annually, which is 0.1 percent of San Francisco's overall GDP. While this is not a catastrophic figure, it is not insignificant, either.
• While proponents argue that it requires all businesses to "pay their fair share," the truth is that the gross receipts tax creates a larger tax burden for start-up companies and companies with a smaller profit margin, e.g., restaurants, retail (Lawson, 2018). This lack of tax neutrality is particularly bad for start-up companies since they are more likely to lose money in their initial years.
• Because the gross receipts tax is taxed at all levels of production (i.e., when a taxable transaction occurs), it creates tax pyramiding (Fleenor and Chamberlin, 2006), which distorts companies' structures [to become more vertically integrated]. If more vertically integrated, it would become more difficult for new companies to enter the market, thereby making it less competitive. 
• The pyramiding causes the costs to be more passed onto the consumer, which creates an even more regressive tax for lower-income consumers that already have financial troubles (Ross, 2016).

Conclusion
There is a reason why so few states have their own gross receipts tax: because it distorts business, is inefficient at tax collection, and has negative economic consequences for business owner and customer alike. If that weren't enough, the particular set-up for Proposition C creates additional issues.

Mayor London Breed, who happens to be a Democrat, is against Proposition C because San Francisco should find ways to better allocate its current funds instead. If we do not find ways to ensure accountability, it could make the problem worse, says Breed. I think she is right. This is another example of "tax and spend" without asking how the money is being spent. San Francisco already spends $380 million annually on homelessness. Rather than repeating the same mistake of throwing money at a system that has not been successful at alleviating San Francisco's homelessness problem. I would ask for San Francisco to get rid of its rent control or land use regulations, but it will more likely go for Proposition C, an idea that is about as stable as a house of cards.