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A proposal to extend San Francisco’s payroll tax to the profits of partnerships, including law firms, is dead. Supervisor Jake McGoldrick’s office said Wednesday it would not pursue the ballot measure that had San Francisco’s business and legal communities in an uproar. The supervisor proposed the tax, which was expected to raise $15.8 million, to help bolster the city’s anemic budget. Jerry Threet, McGoldrick’s aide, said early information indicated that the tax extension would affect only about 10 percent of small businesses, but that proved not to be true. “It turned out there was a flaw in the information we had,” Threet said. “It was not clear that the measure would not adversely impact small businesses, so we pulled it.” In a series of hearings in recent weeks, the board’s finance committee heard testimony from San Francisco’s business and legal communities arguing the tax would be a financial blow to their operations. “This is great news for our members and the business community of San Francisco,” Angela Bradstreet, president of the Bar Association of San Francisco, said Wednesday. “These are tough enough times for our members,” Bradstreet added, noting law firms are struggling with the downturn in the economy. McGoldrick’s proposal would have imposed the city’s 1.5 percent payroll tax on the partnership distributions that go to doctors, lawyers, accountants and other professionals. Those groups already pay a tax for their employees; under the proposal, partners who share in their group’s profits would also be assessed the tax. Bradstreet said characterizing cash distributions to partners as taxable income under the payroll tax would be inconsistent with state and federal law. Jim Mathias, vice president of public affairs for the S.F. Chamber of Commerce, welcomed the death knell of McGoldrick’s measure. “In the blink of an eye, it’s gone,” Mathias said. He said the proposal would have put a new tax on 1,450 businesses, a majority of which are small operations. “When households and businesses are tightening their belts, the message they heard from the board of supervisors was, ‘Give me more,’” Mathias said. “That was the wrong message.” McGoldrick has said he sponsored the measure as a way to make up revenue lost when the city settled a lawsuit brought by businesses last year. That litigation claimed San Francisco’s two-tiered tax system — which imposed either a payroll tax or a gross receipts tax, whichever was higher — was unfair. After a court declared a similar Los Angeles tax unconstitutional, San Francisco settled the litigation for $80 million. It was some of that lost revenue that McGoldrick and Supervisor Aaron Peskin, who supported the proposed ballot measure, hoped to recoup. Although the measure won initial support from the finance committee, McGoldrick withdrew it before asking five fellow supervisors to join him in placing it on the Nov. 5 ballot as a board-sponsored initiative. Threet said an alternate way to place the measure before voters was to have just four supervisors sponsor it on their own. “We’re not pursuing that,” Threet said. The deadline for placing measures on the November ballot was 5 p.m. Wednesday.

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