San Diego has seen a steady drop in the number of businesses applying for city licenses since the beginning of the pandemic, a potentially concerning trend for the local economy.
The City Treasurer’s Office suggested in a recent budget report that the drop could be partly because businesses are choosing to close or leave California based on concerns about affordability and regulations.
The 7.5 percent drop in licenses since fiscal year 2019 is costing the city nearly $1 million a year in revenue. But losses would be much larger if San Diego didn’t charge far less than comparable cities.
The number of business licenses — formally called business tax certificates — reached an all-time high for the city of just over 108,000 in fiscal year 2019. The number stayed at that level in fiscal year 2020, which ended three months into the pandemic.
The number of licenses, which must be renewed once a year on their anniversary date, dropped to 105,000 in fiscal year 2021, 103,000 in fiscal year 2022 and 101,600 in the fiscal year that ended last June.
“The dip didn’t happen in one year — it’s been continuous, year after year, since COVID,” said Ricardo Ramos, a deputy director in the treasurer’s office. “We’re getting out of COVID, but it’s been kind of difficult to figure out when things are going to stabilize.”
The pace of new applications and renewals this year has continued to slow, leaving only about 100,000 accounts active through Feb. 13, Ramos said.
Officials with the San Diego Regional Chamber of Commerce said they don’t track business closures or departures but agreed that the pandemic has had a large effect.
“The pandemic was devastating to our local business community, many did not recover at all, and those that did are still facing many pressures to the bottom line,” said Jerry Sanders, the chamber’s chief executive.
The San Diego Regional Economic Development Corporation said it couldn’t comment on the city licensing downturn because it doesn’t track closure or licensing data.
In 2022, a study by the Rose Institute of State and Local Government found that California had lost nearly 20,000 businesses net since 1990 — and that the trend was accelerating, with net business losses by decade climbing from about 4,200 in the 1990s to 7,300 in the 2000s and to 8,400 in the 2010s.
Also in 2022, a report by the conservative Hoover Institution blamed an exodus of corporate headquarters from the state on taxes, regulations, labor costs, energy prices and the cost of living for workers.
San Diego’s drop in business license revenue also leaves a hole in the city’s budget at a time when deep cuts have been anticipated, partly because the city has run through all the $550 million in federal pandemic aid it received.
Business license revenue, which was $7.8 million in fiscal year 2019, is expected to drop to about $6.9 million during the ongoing fiscal year.
The city had collected $4,489,731 in business license fees through Feb. 13 of last year, but had collected only $4,199,349 through last Tuesday — a drop of more than $290,000 in just one year.
San Diego charges far less for business licenses than most comparable California cities, but the city can’t raise what it charges without a public vote because business license fees are considered a tax.
San Diego charges a flat fee of $34 per year for businesses with up to 12 workers. Businesses with 12 or more workers, which make up only about 5 percent of businesses in the city, must pay a $125 annual fee and $5 more for each worker.
Los Angeles collects nearly $850 million per year in business license revenue — more than 100 times what San Diego does — because it has a tiered fee structure and charges businesses based partly on their gross receipts.
San Diego does not factor gross receipts into its business license tax.
San Francisco receives more than $1 billion annually from business taxes but is facing litigation that challenges the legality of its tiered rates.
Oakland, which is much smaller than San Diego, receives nearly $125 million per year in business taxes — more than 25 times what San Diego does — primarily because it taxes gross receipts like Los Angeles.
San Jose charges flat fees like San Diego does, but it receives more than $85 million per year — more than 17 times San Diego’s revenue — because its fees are higher.
City officials frequently point out that many other California cities receive more tax revenue per resident than San Diego. There has been talk this winter of a local sales tax increase and a city tax to cover stormwater costs.
But officials have not discussed publicly the possibility of putting a business license increase on the ballot.
