Gross receipts tax for homelessness

Prop C, also known as “Our City Our Home,” would tax San Francisco’s largest businesses by $250-300 million per year, dedicating the proceeds to homelessness programs. By also mandating that this funding not replace existing funding, it locks in nearly $700 million per year for homelessness, permanently or until modified by a subsequent ballot measure.

Homelessness is undoubtedly a critical issue for San Francisco today, for which funding would undoubtedly help. But $700 million per year would only be the appropriate long-term spend if we utterly fail to deploy funds effectively. Mayor Breed’s ambitious homelessness agenda is underway, and deserves a chance to progress through normal channels. Prop C would hamstring the General Fund with the largest set-aside in San Francisco history, jeopardizing ability to direct funds effectively toward future priorities.

Homelessness today

On any given night, about 7,500 people are homeless in San Francisco. Of these, about 500 are children, and 4,400 are unsheltered. This is a human tragedy, and while other West Coast cities have seen increases, San Francisco’s homeless share has fallen slightly since 2013, and child homelessness is now half as prevalent.

Many people feel subjectively that homelessness has worsened, maybe by becoming more visible, but no data suggest a sudden crisis.

Of San Francisco’s $380 million homelessness budget, $270 million goes to the Department of Homelessness and Supportive Housing (HSH). HSH spends two thirds of its budget preventing homelessness with rental subsidies, permanent supportive housing, and eviction prevention; 11 percent on administration and one-time capital expenses; and the remaining 23 percent on shelters, street outreach, and health services. That last portion comes to about $20 per homeless person per day.

While each of these programs may contribute to reducing unsheltered homelessness, lack of shelter beds likely keeps it stuck at 0.5 percent. SF has one shelter bed for every three homeless people, a 1000-person (month+) waitlist, and 42% of homeless people sheltered. Unsheltered homelessness correlates to shelter bed availability by city, making San Francisco’s outcomes predictable.

San Francisco’s June budget acknowledged this, and laid out three priorities for HSH: expanding housing exits like permanent supportive housing, expanding Navigation Centers, and investing in the Healthy Streets Operations Center.

Mayor Breed’s plan and progress

In March of this year, three months before Prop C qualified for the ballot, then-mayoral-candidate London Breed released her homelessness platform. At 3,000 words, plus a 1,200-word addendum, it was her longest platform piece, and by far the most detailed from any mayoral candidate on any issue.

The platform examined the complexities of homelessness, listed her past work, and described her plan emphasizing three elements: keep people housed; improve mental health and addiction treatment and address street behavior; and create far more exits to stable housing.

Mayor Breed has made progress on these goals. An additional $60 million in funding for homelessness was the centerpiece of her August 1 press release on the new budget, just three weeks after being sworn in. In early October, she announced plans to add 1,000 shelter beds over the next 2 years, by reshuffling existing funds and seeking additional dollars from the General Fund.

Cost of ending unsheltered homelessness

Plans to construct two Navigation Centers in January were estimated to cost $7.9 million for 205 beds, or $39,000 per bed. At that rate, Breed’s proposal for 1,000 beds would cost $39 million to construct; housing all 4,400 unsheltered homeless people would require $170 million in these one-time costs. Assuming ongoing costs of $37,000 per bed, operating the beds would cost another $160 million per year, or 40 percent of the current budget.

Permanent supportive housing is another option, but requires much higher upfront construction costs: $400,000 per unit if built conventionally, less using modular homes. To build for all 4,400 unsheltered homeless people, conventional construction would cost $1.8 billion, plus $88 million in annual supportive services.

City Hall could also bump up subsidies or cash assistance, helping homeless people afford rent and providing medical care and case management separately.

Prop C ties the government’s hands

Costs described above were estimates produced from publicly available data, without knowing the effectiveness of each approach. Government officials are best equipped to study this complex problem and reshuffle funding as needed.

Prop C limits the government’s ability to determine appropriate funding levels for each tool. It mandates that 50 percent ($150 million) be spent on permanent programs like subsidies and supportive housing, 25 percent ($75 million) spent on mental health services, 15 percent ($45 million) on financial assistance, and 10 percent ($30 million) on shelters. Critically: it cannot replace existing funding, so it also enshrines $380 million in other homelessness spending.

What if the city finds that expanding shelter availability reduces mental illness, and $75 million is no longer needed every year? Or if it determines that permanent supportive housing is more effective than shelters? Or if the reverse? Prop C isn’t just for the next year or two or five, it’s permanent. I’m optimistic that we can get to zero homelessness in the next decade with even less funding than the current $380 million, for example by building a lot more housing to bring down rents and expanding cash transfers for all low-income San Franciscans. But even without major reform, Prop C’s $700 million per year could build enough Navigation Centers to end unsheltered homelessness four times over.

Beyond homelessness, creating a $700 million permanent set-aside makes it harder to respond to new crises. If 30 percent of the General Fund weren’t tied up in existing set-asides, more funds would have been available to shift into homelessness in this year’s budget. Should a new emergency arise, Prop C bumping this share up to 40 percent would slow our ability to address it.

The Prop C tax is the largest in San Francisco history, and it’s poorly designed

Tax effectiveness is secondary to whether the money will substantially address the human problem, but it’s also worth discussing. It’s the largest in our history, growing the gross receipts tax by a third, and has major implications for the 300-400 largest firms affected by it. For example, top-tier construction companies pay 0.45% gross receipts tax now, and would pay 0.925% under prop C. At an industry average 18% profit margin, that’s an increase from a 2.5% tax on earnings to 5.1%.

Funding it as a flat gross receipts tax would avoid these concerns, though this would encounter opposition from San Franciscans who dislike big companies. Better yet, a bond paid from property taxes would tap into the city’s massive real estate wealth. Homelessness affects us all, and we should all be willing to pay to fix it.

Adding a fifth bracket to the gross receipts tax mistakenly applies progressive taxation, which can produce progressive outcomes when applied to individuals, to businesses. The corporation passes on the burden of the payment to three groups of people, customers, employees and investors, and that pass-along occurs no matter what the size of the firm.

Funding programs specifically from a new bracket also makes it more volatile than flat, broad-based taxes. This makes it harder to forge reliable multi-year plans with the funds, and in a downturn, homelessness programs could become meagerly funded.

This could explain the Controller’s report’s predictions that Prop C will cost between 725 and 875 jobs, and $200 to $240 million in GDP (reducing government revenue by about $10 million), even without modeling potential firm relocation or growth reduction.

Prop C would almost certainly accelerate progress toward the worthy goal of ending unsheltered homelessness. If it does so with some of its $700 million to spare, it could be redirected at least partially productively. It would have direct and indirect benefits for all residents.

But this boost isn’t worth the cost, not just to the people affected by the taxpaying businesses, but to our city’s governance. We can end unsheltered homelessness without it; the $160 million for Navigation Centers is extractable from our $5 billion General Fund, and we have a competent mayor and activated Board of Supervisors to make it happen. Solving homelessness the right way will preserve our already-limited ability to address new crises and fund promising new programs, without damaging our tax code.

Join elected officials and homelessness advocates Mayor London Breed, Senator Scott Wiener, and Assemblymember David Chiu in voting no on Prop C.