Oh, the irony. San Francisco is perhaps the most progressive city in the United States, although Portland and Seattle might put up an argument. So how is it that the one thing that might save the City by the Bay from the fiscal abyss is Proposition 13, the iconic tax-cutting initiative backed by conservative Howard Jarvis and approved by voters in 1978?
No one disputes that San Francisco is in crisis. The city’s profligate spending and poor management has led to a myriad of ancillary problems. That the city planned to spend $1.7 million for a bathroom in a park may be the source of humorous derision, but it is an example of seriously dysfunctional governance. (Private donations for the restroom subsequently reduced the cost to the city).
A major structural problem is San Francisco’s diminishing population. As people leave the city, they take their tax dollars with them. The steepest decline occurred between 2019 and 2021 when the city lost 6.3 percent of its population, a rate of decline unprecedented for any major U.S. city. The only silver lining is that the rate of decline slowed to “only” half a percent from July 2021 to July 2022.
Making matters worse is the fact that downtown San Francisco has experienced the weakest recovery from the pandemic out of 62 North American cities according to a San Francisco Chronicle article dated January 18, 2023. Its overreliance on high tech and finance, whose workers are able to work remotely, has morphed downtown into a ghost town. Office vacancies are at an all-time high and rents for office space are falling fast.
The exodus of high-wealth individuals and businesses has wreaked havoc on the San Francisco’s budget, which is now projected to be in the hole by $780 million over the next two fiscal years.
So, with all this bad news, how is it that Proposition 13 can save San Francisco or at least slow down its rate of decline? Lost in all the discussion about spending challenges is the fact that the city is still projecting year-over-year increases in revenue. Much of that is due to how Proposition 13 works.
While providing security to homeowners, Proposition 13 also guarantees stable – and almost always increasing – revenue to local governments. Statewide, assessed value of property generally increases in the 4 to 5 percent range. And even in years when market values decrease, Proposition 13 acts as a shock absorber, stabilizing revenue because of the difference between taxable value and market value.
The two percent limit on annual increases in taxable value means that, for cities like San Francisco with historically big increases in market value, no overall reduction in tax assessments is required even when market values are dropping. Revenue to the city treasury is likely to remain stable. In fact, total assessed property in San Francisco from 2022 to 2023 increased 5.3% according to the California Board of Equalization Annual Report.
Proposition 13 has been characterized as “recession insurance” for local governments. Even with its problems, San Francisco can rely on a relatively stable stream of property tax revenue. Whether that will be sufficient will depend on whether the politicians can get spending under control. Raising taxes to “solve” budget problems just drives away more taxpayers and leaves a bigger hole in the city treasury.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.