INSIGHT

San Francisco voters approve Proposition M, overhauling business taxes

March 5, 2025

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On November 6, 2024, San Francisco voters decisively approved Proposition M, implementing significant changes to the city’s business tax system aimed at creating a fairer and more resilient structure. The measure passed with approximately 69% of the vote, reflecting strong support across the political spectrum for reforming business taxes to better suit the modern economic landscape.

Key changes introduced by Proposition M

One of the primary objectives of Proposition M is the simplification of the business tax system. The measure consolidates the existing 14 business tax categories into seven, reducing complexity and making it easier for businesses to comply with tax regulations. This streamlining is expected to decrease compliance hurdles and reduce the administrative burden on businesses, particularly benefiting small enterprises that may lack extensive resources for tax management.

Adjustment of gross receipts tax calculation

Proposition M also revises the calculation of the gross receipts tax, shifting the basis more towards sales and less on payroll expenses. Specifically, the new calculation is based 75% on sales and 25% on payroll, a significant change from the previous structure. This adjustment aims to address the evolving nature of business operations, especially with the rise of remote work and companies generating substantial revenue with minimal physical presence in the city.

Impact on small and large businesses

While the reforms are designed to support vulnerable businesses, the impact varies across different sizes of enterprises:

• Small Businesses: Many small businesses are expected to experience reduced tax burdens or minimal changes due to Proposition M. By decreasing the financial load on these entities, the city hopes to foster local entrepreneurship and sustain the vibrancy of the small business sector.
• Mid-sized and Large Businesses: In contrast, mid-sized and large employers may face significantly increased tax rates, with some seeing their rates double or even quadruple. This substantial increase reflects an effort to ensure that larger corporations contribute a fair share to the city’s revenue, acknowledging their greater capacity to absorb higher taxes.

Expansion of tax base

A notable element of Proposition M is the introduction of city tax liability for businesses with no physical nexus in San Francisco. This means that companies generating revenue from San Francisco residents or activities, even without a physical location in the city, will now be subject to city business taxes. This change recognizes the digital economy’s realities, where businesses can have a significant economic presence without traditional brick-and-mortar establishments.

Financial projections and revenue implications

According to the Controller for the City and County of San Francisco, Proposition M is projected to reduce city revenue by $40 million during the first three fiscal years due to transitional adjustments. However, starting in 2027, revenues are expected to increase by $50 million annually because of scheduled tax rate increases and the broader tax base. By the fiscal year 2029–2030, the increased revenue is anticipated to fully offset earlier reductions, contributing to a more stable and robust financial outlook for the city.

Broad Support from Political and Business Leaders

The passage of Proposition M garnered widespread support from political figures, business groups, and labor organizations. All major candidates in the city’s mayoral race endorsed the measure, highlighting its significance to San Francisco’s economic future. A pro-Proposition M rally showcased mayoral contenders united in their backing, demonstrating a rare consensus across the political spectrum on the need for tax reform. This collective support underscores the belief that Proposition M will foster a more equitable business environment and bolster the city’s financial health.

Adapting to the modern economic landscape

Proposition M is seen as a response to the changing dynamics of business in an era marked by technological advancements and shifts toward remote work. By aligning the tax system with contemporary business models, the city aims to capture revenue from a diverse array of economic activities while ensuring that taxation is fair and reflective of actual business operations. This approach is intended to create a sustainable fiscal structure that can adapt to future economic developments.

Implications for businesses

Businesses operating in or generating revenue from San Francisco must prepare for the implementation of the new tax structures effective January 1, 2025. Companies are advised to:

• Review and adjust financial strategies to accommodate potential increases in tax liabilities.
• Assess the impact of shifts in tax calculation methods, particularly the emphasis on sales over payroll.
• Seek professional tax advice to navigate the complexities of the new system and ensure compliance.

As Proposition M reshapes the fiscal landscape, careful planning and adaptation will be crucial for businesses to mitigate potential impacts and leverage any benefits offered by the reforms.

Conclusion

The approval of Proposition M represents a pivotal shift in San Francisco’s approach to business taxation. By overhauling the tax system, the city seeks to balance the need for increased revenue with the goal of fostering an equitable and competitive business environment. The measure’s passage reflects a collective recognition of the necessity to adapt to the evolving economic context, ensuring that the city’s fiscal policies support both its financial stability and the vitality of its business community.