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Business Backers to San Diego: California's Dragging You Down

The Washington D.C.-based Tax Foundation pulled some numbers that show San Diego’s tax burden is relatively low but the state’s overall is high.

This post has been updated.

San Diego has a California problem.

That’s the conclusion from a right-leaning think tank that’s long panned California’s hefty tax burden.

The Washington D.C.-based Tax Foundation teamed with the San Diego Regional Chamber of Commerce to put together a series of charts and numbers to compare San Diego with six other U.S. cities that share similar populations and industries.

The Chamber of Commerce, which recently pledged to ramp up its political efforts, plans to use the results to decide which issues to take up at the state and local level.

The study, funded by a grant from the San Diego County Board of Supervisors, reveals San Diego’s local government is smaller and more dependent on taxes than a handful of similar cities.

On the other hand, the Tax Foundation, which annually ranks states based on their relative tax burden, noted that Californians shell out more taxes than their counterparts in most other states.

“Despite San Diego’s low taxes, low spending and comparatively healthy economy, California’s overall burdensome tax climate makes it difficult for San Diego to compete,” the report concludes.

Here’s a look at some of the charts that offer a window into San Diego’s business climate and how state-level taxes and regulations affect it.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

San Diego’s economy is more tethered to government and real estate than other cities.

The Tax Foundation looked at the region’s gross domestic product and found the government share was 50 percent higher than the average U.S. metro area. This reflects San Diego’s massive military and defense presence.

San Diego’s real estate and professional services sectors also surpassed the U.S. average as a percentage of GDP.

Professional services include management, science fields and administrative work, among others. This speaks to San Diego’s abundance of consultants as well as its growing biotech industry.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

At least one major company that left San Diego cited energy prices as a key reason for its departure.

Indeed, data from the U.S. Energy Information Administration revealed San Diego’s electricity rates are up to twice as high as six other similar regions.

The Tax Foundation noted that energy prices are influenced by state energy and environmental policies.

These numbers don’t necessarily mean every San Diegan pays a higher energy bill than her counterparts in Phoenix or Seattle, though.

This chart is based on the average rate per kilowatt hour and a separate federal EIA study found that California has among the lowest average residential energy use rate in the nation.

But companies whose products and services depend heavily on utilities are likely facing larger bills than similar companies elsewhere.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

The Tax Foundation took a deep dive into cities’ annual financial reports to compare how much cash they collect.

San Diego was on the low end of the spectrum, pulling in about $1,990 per capita in taxes and other revenues.

San Diego’s non-tax revenues drove that distinction. San Diego collected significantly less than other cities when it came to services, fines and revenue shared with other government entities. The lack of cash San Diego receives from other governments such as the state or county is one of the key factors behind this trend.

Worth mentioning, though, is that Seattle and Austin both handle local utilities themselves and Denver owns the region’s international airport, bolstering non-tax revenue collections. Seattle and Austin get cash from electricity bills while Denver collects airport revenues that it sinks into related upgrades.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

San Diego’s relatively small share of non-tax revenues means it relies more on taxes to support services than similar cities.

Of those, San Diego is more focused on business and hotel taxes than other cities given its longtime focus on tourism as a major moneymaker.

San Diego’s focus on hotel taxes put the city most was most out of sync with others. About 13 percent of San Diego’s tax revenue comes from hotel charges, more than double other cities.

On the business tax front, about 11 percent of city taxes were culled from businesses, compared with smaller rates in Denver, Minneapolis and Phoenix. Austin – a city known for luring California companies – actually relied on such taxes for 14 percent of its tax revenue.

San Diego’s disproportionate reliance on these taxes is significant because neither is particularly tied to locals who use government services. The city is relying more on out-of-towners and businesses to pay for things.

Variables specific to each state and city play a major role in shaping their tax makeup, though. Portland, for example, gets nearly 95 percent of its cash from property taxes (Oregon doesn’t have a sales tax) while Phoenix and Denver depend on sales taxes for more than half of their tax hauls.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

Governments – including San Diego – often get a bad rap for waste but the Tax Foundation research revealed city spending wasn’t that steep when compared with other metros.

The Tax Foundation found the city spent $1,350 per resident, a figure that doesn’t include expenses from city-owned enterprises such as Qualcomm Stadium.

Only Austin, which spends $1,273 per resident, had a smaller total.

San Diego’s spending – or relative lack thereof – on public safety appeared to help pull city numbers down. San Diego has fewer police officers per capita than many large U.S. cities and the city had repeatedly decreased their pay and benefits by 2012, factors the police union has long decried. The city also significantly curtailed its fire spending during the recession.

“San Diego spends somewhat more heavily on recreation and general government activities than other cities but it has the lowest per capita spending on public safety by a significant margin,” the report said.

San Diego’s tourism-focused economy could be one reason the city’s set aside comparatively more money for recreation.

The Tax Foundation had less rosy conclusions about California’s tax climate.

The report notes state tax rates are among the highest in many categories and that California ranks fourth for its state and local tax burden, according to a separate analysis from the think tank.

The group’s review of almost 30 tax categories revealed Californians pay 11.4 percent of their incomes in state and local taxes while the national average is 9.8 percent.

But the effective rates for particular industries vary and speak to why some businesses thrive in the state while others settle here less often.

Chart courtesy the Tax Foundation and San Diego Regional Chamber of Commerce

Chart courtesy of the Tax Foundation and San Diego Regional Chamber of Commerce

This chart makes it clear: California is much more inviting to research and development companies than distribution centers or manufacturers that rely on heavy equipment.

New research firms experience a roughly 16 percent tax effective rate while distribution centers are hit with an almost 35 percent rate, according to the Tax Foundation analysis.

Once they settle into their business, the rate for mature research firms drops to 9.5 percent but distribution centers continue to face a higher rate of 25 percent.

These numbers have real implications for San Diego as it seeks more manufacturing jobs. State tax rates are higher for auto makers and other machine-heavy manufacturers while those that companies rely more on labor such as manufacturers of sporting equipment or jewelry pay slightly less, according to the Tax Foundation review.

 This is part of our quest  digging into the difficulties – real or perceived – of doing business in San Diego. Check out the previous story in our series, 5 Myths About San Diego’s Business Climate, and the next, For San Diego Businesses, the Sky Is What’s Limiting.

Correction: An earlier version of this post misstated the national average rate for state and local tax payments.

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