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| Nikki Dobay |
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| Timothy Gustafson |
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| Samantha Trencs |
At a high level, putting San Francisco aside, corporate taxpayers were generally successful in their efforts to combat bad policy at the ballot box. This article highlights some of the significant state and local ballot measures affecting businesses.
California Voters Side With Business Community
In California, voters decided two major initiatives — both of which seem to have been decided in the business community's favor.
First, Proposition 22, which was proposed in response to legislation passed in 2019 that extended employee classification to gig workers, appears to have passed with 58.4% of ballots approving the measure so far. With the approval of Proposition 22, app-based drivers for ride-sharing and delivery companies will be considered independent contractors and not employees; however, the proposition also keeps certain employee protections in place — e.g., by providing minimum hourly earning guarantees, health care contributions, etc.
The passage of Proposition 22 creates yet another carveout from A.B. 5 and the three-part ABC test, which presumes that workers are employees unless the hiring entity can satisfy the strict test. A.B. 5 provides over 50 specific carveouts from the ABC test and establishes different standards and tests for certain professions, occupations and industries.
Legislation enacted earlier this year, A.B. 2257, further expanded the carveouts and dwindled the application of A.B. 5's three-part ABC test. With the success of Proposition 22, similar ballot measures may be considered in other states that have adopted the ABC test for determining a worker's classification.
Voters in California also voted on Proposition 15, which would have imposed a split-roll property tax system by carving out commercial and industrial property worth more than $3 million from the state's constitutional property tax limitations, known as Proposition 13. Although there are still votes being counted, the Associated Press has reported the measure has been defeated with 90% of the votes in and the "no" vote currently at 51.8%.
A simple majority is all that is needed for the measure to fail. In addition to the significant opposition this measure received from the business community, the California Assessors' Association also opposed the measure — talk about strange bedfellows — stating that county assessors are not equipped to handle the change in methodology from the historic approach under Proposition 13 to valuing commercial and industrial properties at fair market value on a regular basis.
San Francisco Voters Not So Much
At the local level, San Francisco voters hammered the business community with a slew of new local taxes and changes to the city's existing taxes.
Specifically, Proposition F, which passed with over 67% support, repeals — once and for all — the city's payroll expense tax and increases the gross receipts tax, in addition to creating two so-called backstop taxes that would be triggered if pending litigation invalidates certain taxes enacted in 2018 — the homelessness gross receipts tax ordinance and the early care and education commercial rents tax ordinance.
With the California Supreme Court's recent rejection of the petition for certiorari in the homelessness gross receipts tax case, these backstop taxes may be unnecessary. Nevertheless, the California Supreme Court may be inclined to take up the supermajority vote issue at a future date based on two other cases, in Fresno and Oakland, assuming there is a later split among the California Court of Appeal Districts.
If one or both of these taxes were subsequently challenged and ultimately invalidated, the backstop taxes under Proposition F are meant to provide sufficient additional general fund revenue for the city to refund businesses as necessary and provide ongoing revenue.
One backstop tax would increase the gross receipts tax on certain taxpayers for 20 years if the homelessness gross receipts tax ordinance is invalidated in court. The other backstop tax would impose a new general tax on the gross receipts from the lease of certain commercial space for 20 years if the early care and education commercial rents tax ordinance is invalidated in court.
Proposition L, the so-called CEO tax, passed with 65% support and imposes an additional gross receipts tax or administrative office payroll tax on business with an executive pay ratio of 100-to-1 or greater. The ratio compares the compensation of the highest-paid managerial executive to that of the median compensation of employees based in the city.
The additional rates increase as the executive pay ratio increases, and although a taxpayer's median compensation is based on employees based in San Francisco, the highest-paid managerial employee wage is not required to be that of an employee based in the city.
The determination of this executive pay ratio will create significant compliance challenges as this is not a calculation required for any other state or local tax filing. Businesses may also have difficulty calculating their executive's pay to determine the executive pay ratio as executive compensation varies in form and may be hard to value.
Further, as California's definition of employee has been upended over the past few years, it may be challenging for businesses to determine which workers are included or excluded from the calculation. Considering the compliance burden and based on how the additional tax ultimately impacts business, legal challenges are also possible, including challenges to the tax based on the likely disparate treatment among industries.
Finally, San Francisco voters also passed Proposition I, which doubles the real property transfer tax rate, and Proposition J, which repeals and replaces a parcel tax imposed in 2018 that is the subject of pending litigation, with a new parcel tax. These measures passed with 57.5% and 74.4% support, respectively.
Considering the number of, and the potential fiscal impact of, these changes, businesses affected by these ballot measures and tax increases likely will question their presence in San Francisco and evaluate the benefits of relocation. Even the San Francisco controller's analysis for Proposition L notes the risk of potential relocation by businesses associated with the tax increase from the CEO tax.
Portland-Area Voters Split the Baby — Kind Of
Voters in the Portland, Oregon, area rejected a 0.75% payroll tax being proposed by the Metro Council, which over sees public transportation in Clackamas, Multnomah and Washington counties. Although the measure was expected early on to pass easily, the opposition campaign was effective in its message that now was not the right time for another tax on Portland businesses.
Multnomah County voters did, however, approve a new personal income tax on high earners to fund tuition-free preschool.
Specifically, beginning Jan. 1, 2021, Measure 26-214 imposes a 1.5% income tax on single filers with taxable income derived within the county over $125,000 and an additional 1.5% on taxable income over $250,000. For joint filers, the measure imposes a 1.5% income tax on taxable income derived within the county over $200,000 and an additional 1.5% on taxable income over $400,000.
Beginning in Jan. 1, 2026, the base income tax rate imposed by the measure increases from 1.5% to 2.6%. With the approval of Measure 26-214, Multnomah County will have the highest combined state and local income tax in country, with a combined rate of 13.9%, starting in 2021.[1]
Finally, Portland voters passed two property tax increases, Measures 26-213, a new property tax to fund services for parks; 26-215, a bond renewal to fund Portland public schools; and Multnomah County Measure 26-211, a new property tax to fund library construction and renovations. Combined, these measures are expected to raise over $220 million.
Portland-area businesses and individuals are also still preparing to absorb tax increases imposed through past ballot measures.
During the May primary, Portland metro voters approved Measure 26-210, which supports homeless services and imposes a business profits tax beginning in 2021 on the net income of each person doing business in the Portland metro district, which combines three counties in the greater Portland area, that have total annual gross receipts over $5 million.
This measure also contained a personal income tax component, imposing an additional 1% personal income tax on taxable income over $200,000 for joint filers and over $125,000 for single filers on income over these thresholds. With the passage of the new countywide personal income tax, Multnomah County, which includes Portland, will have a combined state and local personal income tax rate in the country of 13.9%.[2] These tax increases are in addition to the new state commercial activities tax that businesses also face.
According to a recent study released by the State Tax Research Institute in conjunction with E&Y, the recently enacted Oregon statewide taxes will result in a 41% increase once fully implemented, and Portland area businesses will see an additional 23% increase in local business taxes.[3] This would have been a 42% increase had the metro payroll tax measure passed.[4]
As with the San Francisco measures, businesses impacted by the Portland measures may start to consider whether having a Portland area location makes sense. Multnomah County residents may also begin to consider relocating as work from home becomes the new norm.
Arizona High-Earner Tax In, Illinois Graduated Income Tax Option Out
Arizona voters passed Proposition 208, which imposes a high-earners tax. Effective for tax years beginning on or after Dec. 31, 2020, the proposition establishes an additional 3.5% personal income tax rate on individuals with annual taxable income of $250,000 and $500,000 for single and married filers, respectively. This proposal was passed by a narrow margin of 51.8% support and is expected to raise an estimated $940 million in new revenue each to be used for education.
Conversely, Illinois voters rejected a proposed amendment to the 1970 Illinois Constitution that would have allowed the state to impose a graduated income tax instead of its current flat tax. Most states, 32 of 50, have a graduated personal income tax system, with different tax rates applying to different levels of income.
While the measure did not itself propose to change Illinois' tax rate, it would have permitted the imposition of a graduated tax rate system. Legislation enacted in 2019, S.B. 687, switched the state's flat 4.95% personal income tax rate to a graduated tax with rates ranging from 4.75% to 7.99% beginning Jan. 1, 2021, which now will not be effective due to the ballot measure failing. Had that legislation become effective, it was projected to raise between $1.5 and $3.4 billion dollars per year.
Alaska Corporate Disclosure Threat Thwarted, Colorado Measure Offers Property Tax Relief and Georgia Assembly Can Dedicate Funds
A few other measures of note include Alaska Ballot Measure 1, which appears to have been defeated with 59.92% of Alaskans voting against the measure; however, only 82% of the votes have been counted in the Last Frontier State. This initiative would have, in addition to imposing a new oil and gas production tax for areas of the North Slope, made all tax filings and calculations a matter of public record.
Considering the recent fight in California over corporate disclosure legislation, S.B. 972, voter rejection of a similar proposal is extremely welcome. Although there were questions as to whether the public record provisions in the measure were legal, if passed and ultimately upheld, the requirement that all tax filing and underlying calculations information be subject to the state's public records requirements would have made Alaska an extreme outlier among the states.
Finally, Colorado voters passed Amendment B, which repeals several constitutional property tax provisions commonly referred to as the Gallagher Amendments that were aimed to fix Colorado's property tax regime, and Georgia voters approved Constitutional Amendment 1, which authorizes the Georgia State Legislature to pass tax and fee legislation that dedicates revenues for specific purposes.
With the passage of Amendment 1, the Georgia General Assembly will now be able to dedicate funds from revenue raising measures, taxes or fees, for special purposes through enacted legislation, subject to various conditions and other safeguards. Historically, such dedicated taxes/fees — e.g., hazardous waste or tire recycling fees — could only be achieved through constitutional amendment, which arguably incented the legislature to divert those fees into the general fund.
Clarification: This article has been updated to clarify that the Multnomah County tax rate figure of 13.9% does not include the TriMet payroll tax of 0.7%.
Nikki Dobay and Tim Gustafson are partners, and Samantha Trencs is an associate, at Eversheds Sutherland.
Charlie Kearns, partner at the firm, contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See State Tax Research Institute, Oregon State and Local Tax Burdens Study Prepared for Oregon Business and Industry, (October 2020) available at https://cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/oregon-state-and-local-business-tax-burdens_2020_stri-final-report.pdf. Note the study shows a rate of 14.6%, which includes a 0.7% payroll tax imposed by TriMet based on the inclusion of the San Francisco in its combined state and local tax rate. Even without the inclusion of the TriMet Payroll Tax, Multnomah County's rate still exceeds San Francisco's rate of 13.7%.
[2] Id.
[3] State Tax Research Institute, Oregon State and Local Tax Burdens Study Prepared for Oregon Business and Industry, (October 2020) available at https://cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/oregon-state-and-local-business-tax-burdens_2020_stri-final-report.pdf.
[4] Id.
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