Conflict with business-tax reform measure threatens Muni funding effort

Muni is as popular as ever, but an effort to boost its funding to prevent service cuts could fail if a simultaneous move to reform San Francisco’s business taxes proves to be even more popular.

That’s because of a provision buried deep within the text of Proposition M, the business-tax reform measure on the November ballot. That provision essentially declares that it and Proposition L, which would increase taxes on Waymo, Lyft and Uber to fund Muni, are in conflict.

Thanks to that provision — Section 14 of 16, found on page 109 of the 110-page measure — Prop. L can win a majority and still lose if Prop. M attracts more votes.

Although Prop. L has widespread backing among city officials and prominent interest groups, the provision requiring it to get more votes than M has caused some anxiety among those involved in the pro-L effort, said Cyrus Hall, the campaign manager.

“We all feel that this would have been a much easier campaign if we were aiming at 50%,” Hall said.

At first glance, propositions L and M seem to be addressing two completely different problems. The former is intended to help close the yawning deficit the San Francisco Municipal Transit Agency — Muni’s parent agency — faces, which its finance chief recently forecast will reach as much as $322 million in its 2026-27 fiscal year .

Prop. M, meanwhile, represents an attempt to make The City more business-friendly and reduce its revenue dependence on its biggest employers.

The measures bump heads because both would change The City’s gross-receipts tax system. Under that system, companies are taxed in part on how much revenue they generate within The City’s borders.

Prop. L attempts to narrow MTA’s budget deficit by about $25 million annually by placing an additional tax on the revenue robotaxi and ride-hailing companies generate in The City. The tax would range from 1% to 4.5%; the higher the companies’ revenue in San Francisco, the higher the rate they’d pay. At the highest rate, the tax would amount to 45 cents on a $10 ride.

But it comes at the same time that Prop. M would overhaul The City’s entire gross-receipts system, lowering some levies and raising others. Prop. M was specifically intended by those who negotiated it to reduce the complications and add-on taxes — similar to Prop. L — that city voters have repeatedly added to that system over the years.

“Prop. M is supposed to fix all the problems caused by those [past] ballot measures, and Prop. L is the first step in just doing the same thing again,” said a member of the business community who took part in the negotiations around reforming The City’s business taxes.

It’s not clear at whose direction the provision affecting Prop. L was included in Prop. M. The language was in the draft of Prop. M that San Francisco officials released in May , about a month after Prop. L backers submitted their own proposal to the San Francisco Department of Elections.

The City Attorney’s Office wrote the initial draft of the business-tax reform measure, according to San Francisco Chief Economist Ted Egan, who was part of the team of city officials that came up with the parameters of the proposal. But Egan said he didn’t know how the provision affecting Prop L got into that draft.

Alex Barrett-Shorter, a spokeswoman for the City Attorney’s Office, declined to comment on the drafting of the measure. Joe Arellano, a spokesperson for Mayor London Breed’s reelection campaign, declined to say whether Breed was involved in putting the conflict language into Prop. M.

Regardless of exactly how the provision got into Prop. M or at whose direction, it wasn’t intended to specifically thwart Prop. L, several Prop M. backers said.

The business-tax reform measure was the result of a more-than-yearlong effort involving intense negotiations among city, business and labor leaders, said Alex Bastian, CEO of the Hotel Council of San Francisco, who helped lead the talks. The end product was a compromise proposition in which none of the stakeholders got everything they wanted, he said.

In order to keep their coalition together, those negotiating the business-tax overhaul reached a basic agreement that any measure they came up with should be essentially revenue-neutral, said Supervisors Rafael Mandelman, who helped start the reform effort and played a key role in the talks. But neither labor groups nor business leaders were thrilled about that idea, he said. Business groups wanted to push for a big tax cut, while labor wanted to raise taxes to cut The City’s deficit, Mandelman said.

The concern among those who hashed out the compromise that became Prop. M was that one or both of those groups would put a competing measure on the ballot, according to Bastian, Mandelman and Supervisor Aaron Peskin, who also played a central role in the negotiations.

“I don’t think it was on anyone’s mind that someone might be working on what turned out to be Prop. L,” Mandelman said. The concern about another measure, he continued, “wasn’t about L. It was about an alternative business-tax reform.”

The conflict provisions such as the one in Prop. M are commonly found in ballot measures, especially if there’s concern about a competing measure, Peskin said. Propositions D and E, which will also be on the November ballot and offer competing ways to streamline the number of city commissions, each contain similar provisions.

“It’s pretty common language,” Peskin said. “You’ll see it in many different things.”

But at least one person in City Hall familiar with the development of business-tax reform said people involved in that effort were aware of Prop. L, at least after it had been submitted, and were worried that it would undo the work they had just gone through.

The concern is that Prop. L is based on the existing gross-receipts system, not the one Prop. M would establish. If Prop. L were also to go into effect, the robotaxi and ride-hailing companies would have to calculate their business taxes using both the new formula created by Prop. M and in part using the old formula that Prop. M is trying to dispense with, the City Hall insider said.

The advocates who developed Prop. L. “did not take into account the work that we were doing in Prop. M,” the insider said.

But the sponsors of Prop. L said they went through a similar — if not as fraught — process of developing their measure. The group of transit advocates had been working on it for more than a year, determined to find a way to support Muni when it looked like none of the local politicians were going to step forward and do so, they’ve said.

Using an additional gross-receipts tax to fund Muni was not Prop. L backers’ first choice, Hall said. Instead, they wanted to pursue a bigger funding measure that would fully close the agency’s deficit, he said. But after numerous discussions with supervisors, the Mayor’s Office, community organizations and others, it became clear to them that such a large-scale measure wasn’t politically feasible this year, so they dropped the idea, Hall said.

They also explored increasing the existing tax on ride-hailing fares that was imposed by Prop. D in 2019, he said. But that kind of tax is capped by state law, he said, so the transit activists hit on an additional gross-receipts tax.

“When we started looking at smaller options, the one that we felt we could create political momentum behind was a gross-receipt tax on ride-hail activity,” Hall said.

The activists behind Prop. L were aware of the effort to reform The City’s business taxes, said Kat Siegel, one of the measure’s authors. But they didn’t know the proposition that came out of that effort was going to be on the ballot this year, she said.

As far as she knows, Siegal said, transit activists weren’t involved in the business-tax reform effort. And no one from that effort reached out to the developers of Prop. L, she and Hall said.

Regardless, because they knew there was a possibility that a business-tax reform measure might be on the same ballot as their transit measure, Siegal and her collaborators tried to design their proposition so it wouldn’t conflict with what became Prop. M, she said. Prop. L would create a completely new section of the business-tax code, so it doesn’t overwrite any of the existing sections, she said.

Although Prop. L has a provision addressing a potential conflict with a competing measure, its text wouldn’t invalidate Prop. M. And Prop. L would calculate its tax using just the ride-hailing companies’ San Francisco revenue; it wouldn’t take into account their payroll in The City. One of the key motivations of the business-tax reform is reducing the importance of payroll in calculating levies .

“We wanted to make sure we were heading in the same direction” as the business-tax reform effort “and that we were compatible with whatever The City ended up negotiating out with its partners in the business community,” Hall said.

Hall said he reached out to the Prop. M backers once the measure was submitted to the Department of Elections and the conflict between the two became clear. But he said he got little response.

Although Prop. L’s backers aren’t happy about having to garner more support than Prop. M, Hall said they feel like they have momentum at their back. In a recent survey of Muni riders, 72% rated the transit service as good or excellent — the highest level of support recorded since the agency began polling riders in 2001.

Prop. L’s backers got 7,000 more signatures than they needed to get the measure on the ballot. They’ve also secured the support of 10 of the 11 city supervisors , Mayor Breed, House Speaker Emerita Nancy Pelosi, state Sen. Scott Wiener and numerous community groups.

“We’re definitely not sitting around fretting about” having to get more votes than M,” Hall said. ”Because the only thing that we can do is just run the absolute best campaign possible and get the highest number of votes we can get.”

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