It’s going to be a brutal year for the San Francisco budget—and the only way to avoid massive cuts to essential services, including yes public safety, may be for the mayor and the supes to rethink the local tax system.
That will require some changes in state law.
San Francisco, like most cities and counties, has four main sources of local revenue: Property taxes, sales taxes, business taxes, and various fines and fees (including, for example, real-estate transfer taxes). The rest of the budget is money from the state and federal government.
Some taxes are far more progressive than others.
Generally speaking, sales taxes are the worst, because the rich and the poor pay the same percentage. Property taxes are a bit better, because, again in general, people who own property tend to be better off than people who don’t (although in some cases, landlords can pass property taxes onto tenants).
Progressive income taxes are far more fair if they’re set up so that the more marginal income you make, the higher percentage you pay.
A wealth tax would be the fairest of all.
Let’s start with property taxes.
For decades, San Francisco has, by public policy, linked its economic future to a downtown office economy driven at first by finance, insurance, real-estate and Pacific Rim trade and later by tech.
Turns out that those are exactly the jobs most easily done remotely.
The city’s office vacancy rate is not only high, but shows no signs of coming down. The days when those industries would fill the Financial District and Soma with tens of thousands of daily office workers appear to be over.
Among other things, that means all those big, fancy office buildings aren’t going to have tenants willing to pay premium rates for office space, which means the owners can claim the value of their property has plummeted.
That, in turn, means that they can apply for a reduction in their property taxes, which are based on the assessed value of the property. That’s happening now, with landlord claiming that $90 billion worth of property is worth less than $50 billion.
Kathleen Pender, who has been covering finance at the Chron for years, points out correctly that not all of the appeals will be successful, and it will take a while for all of these requests to work their way through the system.
But if the value of a highrise office building is based on how much rent the owner can get, it’s pretty clear that many of the appeals are going to have some success. (Never mind that these same folks have been in effect cheating the city out of billions over the years, thanks to Prop. 13.)
According to the Chron, Ted Egan, the city’s economist, says that may cost the General Fund $200 million a year. He may be optimistic: The office economy may be dead, and until we find another use for those buildings (and the owners take a huge financial bath) downtown may never recover.
Then let’s look at sales tax.
Again, the city depended for years on people coming into downtown San Francisco, either for work or to shop, and spending money, that translated into sales taxes. The mayor and the big stores can complain about crime all they want, but the reality is that much of that shopping now happens online—and without downtown workers to drive foot traffic, it’s not getting better.
San Francisco gets a little money from online sales. The state charges sales taxes on, say, Amazon purchases shipped into or bought from California, and Egan told me that the General Fund gets one percent of the state’s sales taxes from online purchases within San Francisco.
But it’s pretty limited.
Business taxes these days are based mostly on gross receipts, which is a rough, imperfect, approximation for business size and profit. It’s imperfect because some companies (grocery stores) might have high gross receipts but very narrow profit margins; others (tech startups) might have lower gross receipts but very high income (from investors).
Again, a lot of this was based on the idea of downtown companies paying a lot of taxes.
This entire model is radically outdated for the modern urban economy. The main reason is that the state Legislature has strictly limited the ways cities and counties can collect revenue.
Local government, among other things, can’t collect income taxes.
The federal income tax system used to be very progressive; people with incomes of millions of dollars paid very high rates. (Remember, income taxes are based on marginal income in the US; the first $25,000 you make is taxed less than the next $25,000, and so on, up to the maximum, which in the post-war era was as high as 80 percent. That didn’t mean you paid 80 percent of your income to the government. It meant you paid 80 percent of your income over a certain amount. The idea is that once you are making, say, $10 million a year, and you get a raise to $11 million, you don’t really need all of that extra million.)
Now, in the post-Reagan era, the very rich pay far lower marginal taxes. And since many now make much of their money through what’s called “capital gains,” meaning profit off existing wealth and stock options, they pay even less.
But the state of California still has a pretty progressive income tax, and that model could apply to local government.
In theory, corporations also pay income tax: A big business that ends the year with $1 billion in profits has to pay some of that to the government. In practice, many of them find ways to cheat and pay little or no taxes at all.
But again, in theory, corporate income taxes are more fair than gross receipts taxes.
If San Francisco could tax the income of the highest earners, and the profits of big business, it would change the entire financial picture.
A lot of small businesses are barely making it, and yet have to pay business taxes. A lot of very rich people pay almost nothing to live in San Francisco. The city has to scramble to find ways to raise revenue, many of which (like Muni fare hikes, parking fees and fines, and sales taxes) are hugely unfair and regressive.
Progressive taxes on high-end real-estate sales have brought in millions for affordable housing, which the mayor refuses to spend, but there’s only so much more that the city can get from that approach.
It’s going to get worse.
The city can’t raise property taxes, thanks to Prop. 13 (and local law allows landlords to pass through to tenants half the cost of the minor tax hikes that bond acts can involve). The existing sales taxes and business taxes are almost by definition unfair.
So where is the more than $800 million the city is going to lose in the next two years going to come from?
The Breed Administration’s answer is cuts. I am not going to sit here and argue that there’s no fat in the municipal budget: A very wise man who was president of a mid-sized university where I served on the board of trustees once told me that there’s no such thing as a large institutional budget that doesn’t have some waste—and there’s no such thing as a large institutional budget that isn’t missing some things that ought to be there.
But there’s not $800 million of waste. Since the mayor is determined to keep and increase the police budget, which is going to approach $1 billion soon, the only way to cut is to reduce essential services that the city badly needs.
Step back: One of the reasons that the city budget has gone up so much since the 1980s is that San Francisco now has to provide a lot of services that the federal government used to pay for. Washington back in the day paid for public housing, subsidized transportation and public health, paid for enough welfare that nobody was homeless … urban America used to matter in Congress and the White House. The state adequately funded K-12 and community college education.
Now it’s all on local government.
That’s reality. It’s also a huge crisis—and a huge opportunity to change the way municipal and county finance works in California.
New York and Philadelphia both have city income taxes, which can be set at very progressive rates. San Francisco, for example, could have a local tax that exempts, say, the first $100,000 you earn from any taxes at all, then taxes the next $100,000 at one percent, and the next $100,000 at 1.5 percent, and income of more than, say, $1 million at three percent (equivalent to NYC and Philly).
(Since most people who earn more than $1 million a year itemize deductions, and since the IRS considers most state and local taxes deductible, those rich people can write the local tax off their federal taxes, meaning a lot of the money would come back to us from the feds anyway.)
The city could use that money to reduce sales taxes, Muni fares, parking tickets, small business taxes, or anything else. It could also fund essential city services.
Same goes for businesses: A local corporate income tax could replace the gross receipts tax, and charge only those who are making a profit, not those who are just getting by. Hit Salesforce up at a much higher level than the local corner store.
Since so many local business have branches in other cities and can try to hide their income, the city might want to stick with gross receipts. But it’s worth a look.
With a serious reform effort, the vast majority of residents and small business would pay lower taxes and fees than they do today. A small minority who can well afford it would pay more.
The rightwingosphere, and the Mayor’s Office, and Big Tech, and the Chamber of Commerce, will all say that income taxes will drive rich individuals and businesses out of the city.
Really? There are 84 billionaires in San Francisco. They own expensive homes (that are probably worth a lot less today than they paid for them). They are part of high society, and have business connections. The cost of a modest city income tax would be far less than the cost of moving.
Same goes for businesses; in fact, a lot of companies, even big companies, with high gross receipts and low profits would be better off under a corporate income tax.
Study after study has shown that taxes are not a major factor in corporate relocation decisions. Sure, a few very rich people who own houses all over the world could move their primary home location to another state, but there are ways to write a tax law that deals with scams.
The only way this works is if our representatives in Sacramento (that’s you, Scott Wiener and Matt Haney) are willing to work to allow—not require, but allow—local governments to impose the only types of taxes that are really fair.
That would require the mayor and the supes to come together, and organize cities and counties all over California, to pressure the Legislature to act. I don’t see Mayor Breed doing that.
I’m open to other ideas, and the supes ought to be looking at all options. But at a certain point, I’m not sure what other choices we have.
