San Francisco’s Employer Health Tax: Change We Can Do Without – Pacific Research Institute

San Francisco’s Employer Health Tax: Change We Can Do Without

Mayor Gavin Newsom’s Healthy San Francisco plan, which he claims is a model for President Obama’s “public option,” recently picked up some scholarly support. Business owners and low-income workers are not likely to find it encouraging.

Effective since January 2008, San Francisco’s Health Care Security Ordinance comprises a head tax on every employee who works at least 10 hours a week, but does not have health insurance. The tax is $1.85 per hour for firms with at least one hundred employees, and somewhat less for firms with fewer workers. For restaurants and other employers with low-earning workers, this has to be a business and job killer. Maybe not, according to three economists associated with the University of California at Berkeley.

In an op-ed in the New York Times (August 21), they proclaimed that nobody lost a restaurant or retail job because of the tax hike. According to professors Arindrajit Dube, William H. Dow, and Carrie Hoverman Colla, “there was no indication that San Francisco’s employment grew more slowly after the enactment of the employer-spending requirement than did employment in surrounding areas in San Mateo and Alameda counties,” as of December 2008.

In a more scholarly article, the trio reports “initial findings” from a regression analysis that purports to demonstrate this effect. It seems odd they would emphasize employment in San Francisco and two neighboring counties, rather than employment within San Francisco in retail, restaurants, accommodations, and food services versus other (presumably higher wage-earning) sectors. After all, only uninsured workers earning low wages are at risk from this tax hike.

From December 2001 through December 2007, “other private sector” employment in San Francisco shrank 0.2 percent annually. It did the same from December 2007 through December 2008, the period in which the city imposed the new tax. So there was no secular change in San Francisco’s slow decline over the eight years. There was, however, there was a significantly greater slowdown for retail, restaurants, accommodations and food services.

For retail, the annualized rate of job growth declined 3.4 percent between the two periods, from 0.2 percent to negative 3.2 percent. For restaurants, the drop was 2.6 percent, from 2.7 percent growth in the first seven years to 0.2 percent in 2008. And for accommodation and food services, the trend dropped 3.3 percent, from positive 2.4 percent to negative 0.8 percent.

These industries did even worse in Alameda and San Mateo counties than in San Francisco, which led the three economists to conclude that the tax hike did no harm. But those two neighboring counties suffered significantly worse job losses overall than San Francisco did, so it’s not surprising that the industries of interest also suffered more.

The economists appear to believe that restaurants were simply able to pass the tax hike on to their customers, noting that one quarter of restaurants have levied an explicit “surcharge” of 4 percent. These scholars assert that the demand for restaurant dining is perfectly inelastic in the short term. In the long term, they recognize that the workers will give up wage increases. That will doubtless come as great relief to those earning at or near the minimum wage.

The primary target of the tax hike was the Golden Gate Restaurant Association, which sued the city when the law was first passed. The suit alleged that the ordinance violated the federal Employee Retirement Income Security Act (ERISA). Although precedent suggested the Association had a good chance, the city has prevailed all the way to the U.S. Ninth Circuit Court of Appeals. The Association notes that “statistically very few cases are accepted by the U.S. Supreme Court,” but has appealed to the high court anyway.

So, San Francisco’s restaurateurs are spending lots of money to appeal a case for which, they publicly admit, they have very little chance of even getting a hearing. This is not the behavior of an industry doing just fine under this tax hike.

Since January, 2008, San Francisco’s health tax has funneled about $23 million to the city’s public-health bureaucracy. The myth that this transfer of income has been costless must not be allowed to influence the national debate.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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