For the last forty years, California has required that new taxes earmarked for a specific purpose be approved by a two-thirds supermajority in a general election to pass. But the state’s supreme court has thrown out this protection for new tax initiatives that are brought forward by a citizens’ group, rather than by government directly. Predictably, new and expensive tax initiatives are now being brought by citizens’ groups and are passing by simple majority when they would not pass by the previous supermajority rule. This ruling has the potential to substantially depress the California economy and to send even more businesses that are highly productive out of the state.
This issue is now front and center in San Francisco, in which voters passed Proposition C, the largest tax increase in the city’s history. This new tax —about 0.5 percent on gross revenue for businesses with more than $50 million in revenue, or 1.5 percent on payroll expenses for businesses headquartered in San Francisco with greater than $1 billion in revenue— is levied on roughly the largest three percent of the city’s businesses. The city estimates that this tax will yield an additional $300 million in revenue in the first year, which would be used to fund additional programs for the homeless. This would roughly double the city’s homelessness budget.
This new increase comes on the heels of two other special-purpose taxes in San Francisco, one on gross rental income to pay for childcare services and another on land parcels to increase teacher salaries.
California’s supermajority rule had its genesis in the late 1970s with Proposition 13, which limited property tax increases to two percent per year unless the property was sold or improved, and which also required a legislative supermajority for raising other taxes. In 1996, California’s supermajority rule was broadened with new legislation that amended the state’s constitution by adding voter-approval requirements for all local government taxes that previously did not exist.
This brings us up to last year, when the state’s supreme court ruled that tax measures initiated by a citizens’ group, rather than directly by government, require neither supermajority approval nor a general election vote. This ruling suggests that new taxes can be passed with the approval of just a simple majority and through a special election, in which voter turnout barely reaches double digits. This means that roughly six percent of voters can decide the outcome of proposed new tax legislation.
Not surprisingly, taxpayer advocacy groups are filing lawsuits. San Francisco is collecting these new taxes, and the revenue is being parked in accounts until lawsuits about the supermajority requirement and general-election voting are decided.
Supermajority rules are controversial. Some consider them to be inconsistent with the basic principle of democratic governance, because the minority decides for the majority. Others argue that a supermajority protects the minority from legislative tyranny from the majority, and thus promotes compromise. In any case, many states have some form of a supermajority requirement. California’s recent supreme court ruling has the potential to substantially change local government tax policies and local economies, and San Francisco’s new tax is bad economics that will depress the city’s economy.
The city’s gross revenue tax disproportionately hits financial service firms, which are charged higher tax rates than technology companies. The financial services tech company Square illustrates the danger of the city’s new revenue tax. Square provides software and hardware payment services, with a focus on credit card transactions Just 9 years old, Square is a $3.3 billion company with about 2,000 employees but is still recording an operating loss. San Francisco’s new revenue tax will cost Square an additional $20 million each year.
This tax obligation is twice as high as that estimated for the technology company Salesforce, which will generate revenue of about $13 billion this year.
Perhaps not coincidentally, Marc Benioff, CEO of Salesforce, whose headquarters are in a neighborhood with a particularly severe homelessness problem, supported the new tax, while Jack Dorsey, CEO of Square, opposed it. Other notable firms who fought the new tax include Visa and Lyft.
A city report concluded that economic loss from the new tax would be minimal, representing a job loss of only about 0.1 percent, or roughly 875 jobs over 20 years. This led homeless-advocacy spokesperson Brian Bassinger, executive director of the Q Foundation/AIDS Housing Alliance, to state:
“This report shows that the big corporations who are funding the opposition to Prop C are still huge economic winners from the Trump Tax Giveaway even after this measure passes. San Francisco expects more from its corporate leaders.”
However—and this is a very big however—the city report assumed that no businesses would leave San Francisco. But suppose that Square decided it was in their interest to relocate to avoid paying the annual $20 million in new taxes. Roughly two-thirds of Square’s employees work in San Francisco. With Square’s hypothetical departure, job loss in just one year would be about 1,400, substantially more than the city report estimates over 20 years.
Every sensible government knows the fable about killing the goose that lays the golden eggs. The moral of the story is that one does not set taxes at such a level that they devastate economic activity. San Francisco is doing just that.