Remote work’s downside: Empty offices mean SF could lose millions in tax revenue

“The city’s business tax base, which is our second largest revenue source next to property tax, is based in part on where people are working from,” said San Francisco City Controller Ben Rosenfield.

For many employees in tech and other high-paying but still largely remote industries, that is not San Francisco.

For example, “We don’t tax all of Google’s revenues by the San Francisco tax rate,” said San Francisco Chief Economist Ted Egan. Instead a share of that money generated in San Francisco is what gets skimmed into city coffers. Despite city voters ratifying Prop F’s shift to taxing businesses on their gross receipts instead of payroll, determining how much of that revenue should go to the city is still largely based on who is working where.

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

The money goes into the general fund and isn’t allocated to a specific service, although impending city layoffs last year that were narrowly avoided gave a sense of how funding gaps can impact municipal services.

According to Rosenfield’s office, the 100 largest companies in the city measured by their 2020 San Francisco gross receipts reported a 14% decline compared to 2019 gross receipts. That equated to a drop of $7.9 billion reported on their tax filings and included a 13% drop in reported gross receipts in the city among information (tech) and financial services businesses.

The controller’s office said that drop is likely due to telecommuting and they expect much of the same once 2021 wraps up, with remote work becoming more entrenched along with the virus’ hold on society.

That could also pose a problem since the Prop. F envisions business taxes on both of those industries that increase between 2020 and 2024. In 2024, under the measure, the city’s information industry is expected to pay $43 million more compared with 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 not clear if all of that expected tax money will materialize in the city treasury. It’s also not clear exactly how many people are working remotely for San Francisco companies. About half of all jobs in San Francisco can be done remotely, according to a study by the Bay Area Council.

While some of that revenue is likely to ebb, the city is also reaping less money from other industries hit hardest by the pandemic. Retail, service businesses, manufacturing, arts, entertainment and recreation, accommodations and food services will see tax cuts in 2021 and 2022 as a pandemic relief measure before their rates increase in 2023.

“2022, 2023, that’s where it becomes more of a guessing game,” in terms of what business revenues the city will see, said Rosenfield, the city controller, adding that part of the answer will depend on major employers’ long-term working arrangements.

Egan said the city is likely to see budget problems in the future, particularly as federal stopgap funding wanes in the coming years.

“The city’s five year financial plan envisions ongoing budget problems as the federal income supports go away,” he said. That included the loss of the emergency federal CARES Act money and other federal funding that is expected to amount to hundreds of millions of dollars.

A report from Rosenfield’s office from earlier this year said whether the city’s expected budget would hold up is something of a question mark and, “Is closely tied to the recovery of sectors most affected by the pandemic: tourism, office industries, and small businesses.”

Whether telecommuting, out-migration, and conventions and international travel pick back up or stay depressed “will be critically important to the city’s tax base,” the report said.

While some conferences and events have returned to the city, hotels are still largely vacant and far below the common pre-pandemic occupancy rate of 80%. That causes the city to miss out on significant hotel tax revenue as well.

The Controller’s Office said in fiscal year 2020-21, total hotel tax revenue was $42.2 million, down 85% from the year before and down close to 90% from the previous high mark in fiscal year 2018-2019.

There are other unknowns as well.

United States Postal Service data has shown that many people who left San Francisco during the pandemic relocated elsewhere in the Bay Area. But, if they want to return to the office, there won’t be as much space to come back to as companies have offloaded expensive rents for large spaces to save money and build in remote work for good.

Yelp said earlier this month it will cut its office space by about a third and isn’t planning on workers returning until next year. Salesforce and Twitter have already said they won’t require most of their workers to be in any one location ever again. And Facebook initially eyed a broader return to its offices but pulled back in recent months in favor of allowing employees to request permanent remote work as the delta variant spread.

Even some startups are no longer requiring employees to monitor the in-office kombucha taps, and while tech job postings in San Francisco have recovered to pre-pandemic levels by some measures, the number of jobs that allow remote work is growing, according to data Egan presented to city supervisors in September

There are some mitigating factors that could save the city from spilling too much red ink.

“The tech industry as a whole had a huge 2020,” Egan said, noting that while the city may see less revenue because of remote working, “The size of the pie grew.”

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

In July the city’s vacancy rates for offices rose to 20%, the highest level in almost 20 years despite an increase in leasing activity.

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

Rosenfield, the controller, said it won’t be clear until early next year how much revenue the city lost out on in 2021 because of remote working.

“Big picture, 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 tech … the other is the hospitality industry.”

With the pandemic’s convulsions still rippling through both, he said the only question left is how large its impact will ultimately be.

In the report his office produced in June, Rosenfield’s office said the city’s budget assumes the ongoing economic recovery will drive annual tax revenue growth by about $250 million in fiscal year 2021-22 and roughly $500 million in fiscal year 2022-23.

But those projections assume large-scale remote work will fade rapidly in the coming two fiscal years, a possibility that seems increasingly unlikely with each passing day.

Chase DiFeliciantonio is a San Francisco Chronicle staff writer. Email: Twitter: @ChaseDiFelice

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