The Oakland City Council has proposed increases to the city’s business tax for the city’s largest employers. This analysis seeks to more clearly define the regional and economic contexts that could make any tax increase detrimental to Oakland’s future economic prosperity by diminishing the demand for office space in Oakland, which would create a related reduction in demand for hotels, retail, housing, and other synergistic business activities.
An Analysis of Oakland’s Proposed Business Tax Increase
The City of Oakland is considering a number of alternative ballot measures to increase its business license tax through a gross receipts structure that levies progressively higher taxes on companies with higher levels of revenue. The proposals being considered, and the analyses presented to date regarding the impacts of these tax structures, do not adequately consider the likelihood that such steep and heavily concentrated tax increases will threaten Oakland’s near-term economic recovery and its longer-term prospects for job growth.
The city’s own analysis concludes that imposing the proposed tax increases of 100-760% on Oakland businesses will drive existing employers to reduce jobs in Oakland. The proposed tax increase also poses risks to the city’s budget by undermining future economic growth from employers locating in Oakland and by discouraging in-person returns to Oakland offices. A reduction of Oakland office workers and less demand for office space will cause economic ripple effects. Small downtown businesses will have fewer customers that they rely on to sustain their businesses and a reduction in office development projects will produce a loss of construction jobs – both of which are critical to growing a wide range of quality jobs in Oakland.
The City Council and a Blue Ribbon Task Force set out to create a more progressive business tax structure that would increase city revenue to pay for services and provide tax relief to small businesses. The magnitude of the tax increases being proposed, however, is likely to result in negative consequences that will limit future economic growth while undermining existing and future city tax revenue sources. The proposed business tax changes in Oakland will:
• Raise taxes on the city’s largest employers by as much as 760% – The size of this tax increase is unprecedented, particularly in a time of economic uncertainty, and will create a major deterrent for large businesses to remain, expand, or move into Oakland. The proposal comes at a time when central business districts around the country are struggling to get office workers back from remote work and to support local small businesses dependent on office workers. Significant tax increases are counter-productive to supporting downtown recovery and long-term growth.
• Double the city’s reliance on employers whose taxes are increased 760% and add volatility to the city budget – The proposed tax increases will almost double the city’s reliance on the very taxpayers most adversely impacted by the proposed tax increases. Under the proposal, almost 25% of all business taxes will be paid by 52 companies. This makes the city more susceptible to significant tax revenue loss if large employers relocate or more of their workforce’s work remotely. By contrast, San Francisco has approximately eight times as many companies with over $50 million in revenue and each company’s share of San Francisco’s business tax revenue is less than half of what Oakland is proposing. Thus Oakland will have dramatically greater reliance on a much smaller number of companies. Oakland is already more reliant on business taxes as a percentage of its total budget compared to neighboring cities, and the proposed tax change magnifies the economic and fiscal risks.
• Make Oakland’s business tax the second highest in the region behind San Francisco’s – where recent tax increases have had a significant influence on corporate relocations out of San Francisco, some of which have resulted in business in-migration to Oakland and resulted in increases in Oakland’s tax receipts. The proposed tax increase would erase this comparative advantage that has been helping to fuel Oakland’s economic, job, and tax revenue growth. The city’s own analysis projects that the proposed tax increase will cause companies to shed jobs. If new employers willing to pay San Francisco-level business taxes do not materialize immediately to backfill these job losses, post-pandemic job and revenue recovery is significantly threatened.
• Jeopardize tax revenue gains achieved from growth achieved during the past decade – The city auditor reports that Oakland’s recent economic growth has led to a 50% increase in city tax revenues from $880 million in fiscal year 2012-13 to $1.318 billion in fiscal year 2019-20, in part fueled by the city’s competitive business cost (including business taxes) compared to San Francisco. During this time, tax receipts have increased over $60 million per year from organic growth, or twice what the tax proposal seeks to raise. While revenues are down from the pandemic, proposed tax increases will inhibit future growth. Policies focused on increasing economic growth will be successful in increasing tax revenues, decreasing risk to the budget, broadening the tax base, and increasing job opportunities for Oakland residents and companies while maintaining Oakland’s regional competitiveness. A study by Hausrath Economics Group shows that just two office projects in the planning pipeline would generate a combined $26.3 million annually in business and other taxes. If those office projects are not built due to lack of demand, there is a huge opportunity cost for the city.
• Threaten Oakland’s economy more severely when compared to San Francisco’s recent business tax increases – San Francisco is a world commerce center with a much larger and more diverse economic base, including almost 400 companies with over $50 million in gross receipts compared to only 52 companies in Oakland. Following recent San Francisco tax increases – which raised taxes by nearly 200% for the largest employers – dozens of companies left San Francisco, often citing a high cost of doing business. The Oakland proposal increases business taxes by a far greater amount than the policies enacted in San Francisco. Oakland’s smaller economy cannot follow San Francisco’s lead on taxes without suffering more severe consequences.
• Drive out significantly more jobs than projected – Adverse impacts from job losses will be greater on the very small businesses that the proposed legislation purports to support. The city’s own analysis indicates a significant loss of jobs from these proposed tax increases. However, the city’s analysis understates the job losses because it does not look at the secondary effects of job losses on other industries. Every job lost has a multiplier effect on demand for other jobs – usually small business jobs – through demand for food and beverage from restaurants, bars, grocery stores, hospitality, and numerous services including fitness, construction, laundry/cleaners, retail sales, deliveries, health and wellness, accounting, tax preparation, and meetings.
The proposals to raise Oakland’s business tax ignore these serious long-term consequences to the city and will undermine hoped-for improvements in equity, small business support, and city revenue growth. The city’s economy is currently in need of policies that will drive a faster recovery in employment to grow jobs in businesses of all sizes and grow the city’s budget accordingly. The proposed increase in the business tax will only do the opposite, and it will be detrimental to the city’s ability to attract and retain jobs for Oaklanders well into the future.