On the last day
of budget talks, the City got an unexpected $13 million in revenue from the transfer tax that made a critical difference. Coming from the sale of ten commercial properties, this never would have happened without Proposition N – an increase in the transfer tax for real estate over $5 million, which the voters passed in 2008 with Mayor Gavin Newsom’s blessing
. Now, as the City faces worse deficits in the future, the Supervisors are looking at various revenue measures for November. Each proposal is narrowly targeted, and each would generate approximately $20 million. But there’s a political reality that we must be strategic about which ones to put on – or they will all fail. And to make matters worse, Newsom now has a Republican “no new taxes” stance – as he panders for statewide office. He’s even submitted a rival to the Hotel Fairness Initiative, which has poison-pill language that would sink the $3/night increase in the hotel tax. And we’re even seeing the Mayor jettison proposals that his own staff had crafted and supported.
As Assessor Phil Ting announced last week, the City took over $83.7 million in revenue from the real estate transfer tax this year – compared with $48.9 million last year. Ting credited most of that to the real estate market finally heating up again after a slump, but this unexpected surge was no accident. In June 2008, as the City faced a slew of budget cuts
, then-Board President Aaron Peskin proposed doubling the transfer tax for high-end properties.
After tweaking it
in committee to gain majority support, Proposition N only applied for real estate transactions of over $5 million – replacing the standard rate of 0.75% to 1.5%. Prop N passed, and this year the Top Ten commercial properties generated the new $13 million.
Why did Prop N pass
? Because rather than dump a slew of tax measures on the ballot, progressives were smart – and put just Prop N and Prop Q (which closed a loophole in the payroll tax, while lowering it for small businesses.) It should be a model for this year’s efforts.
An obvious measure this year would be the Hotel Fairness Initiative – which temporarily raises the Hotel Tax by two percent (or the equivalent of $3/night for a $150/night room) – and has now qualified for the ballot
with enough signatures. The hotel tax has not been raised in 15 years, and it was smart
not to rely on four Supervisors to put it on the ballot – but instead to do a signature drive.
But as we learned at Friday’s Budget and Finance Committee, Mayor Newsom is playing hardball in opposing the Hotel Fairness Initiative – and has submitted his rival measure. Beyond raising the hotel tax by 2%, the Hotel Fairness Initiative clarifies language in the hotel tax to stop online booking agencies and airlines from skirting its legal requirements. Newsom’s rival measure has identical language to that effect, but not the 2% increase.
I had known about Newsom’s rival measure, but figured the campaign could just advise voters to support both propositions – because in case the 2% increase fails, we still need the (lesser) revenue that closing the loopholes would bring. But Newsom’s measure has poison-pill language that says the Hotel Tax “shall remain” at its current level – and any other proposition on the same ballot that receives fewer votes is null and void. Even if both measures pass, the 2% increase only passes if it gets more votes than Newsom’s.
This puts activists in a position where they must campaign against Newsom’s measure. With dueling ballot measures
this November on the same issue, voters may get confused and defeat them both – which may have been the plan all along. It won’t be pretty, and Budget Chairman John Avalos was visibly upset at Friday’s Committee meeting. “This is very smart,” he told Greg Wagner, the Mayor’s Budget Director. “I don’t agree with it, but it’s smart.”
Meanwhile, three Supervisors have each proposed three different revenue measures for the November ballot. All of them are good public policy, but politically we know putting them all on is suicide. In 2004, the Berkeley City Council put a series of tax measures on the ballot – and the landlords ran a joint campaign called “BASTA!” to defeat them all. It worked. Even though Berkeley voters were motivated to turn out in droves against George Bush, they defeated public financing for elections and money for public libraries.
Which means we will probably have to pick only one of these three measures:
Business Tax Measure:
Sponsored by Board President David Chiu, this one is probably my favorite – revenue projections are robust, and the economic analysis shows that it will help increase private sector jobs. But it’s also the most complicated one, and I fear voters will not understand it. It lowers the payroll tax for small businesses, but then imposes a commercial rent tax for large businesses who are exempt from the payroll tax.
Currently, state law prohibits San Francisco from imposing its payroll tax on banks, real estate companies, insurance companies and other industries. As a result, only 10% of all businesses pay the payroll tax. The idea behind David Chiu’s proposal is to more fairly and equitably tax big businesses – instead going after commercial rents that are above a certain monetary amount. The Controller’s Economic Analysis shows that it would help private sector jobs by relying less on the payroll tax – while generating more revenue.
Real Estate Transfer Tax:
Because the sale of Downtown real estate was a key factor in resolving our budget problem this year, Budget Chair John Avalos would like to raise the real estate transfer tax for multi-million dollar properties. For those above $5 million, the tax would go from 1.5% to 2%. If the transaction is above $10 million (and many of this year’s commercial properties sold for more than that), it would be at 2.5%.
On the one hand, we only just raised the real estate transfer tax two years ago – so attacks on this measure are predictable. On the other hand, voters support raising taxes if they know it won’t affect them. Avalos’ measure only affects multi-million dollar properties.
Supervisor Ross Mirkarimi has proposed raising the parking tax from 25% to 35% – and closing the loophole on valet parking. Under provisions in the City Charter, 80% of this revenue would go to fund Muni. The measure’s biggest selling point is that we haven’t raised the parking tax since 1980. But unlike the transfer tax that only affects big real estate, the hotel tax that only affects tourists or the business tax that only affects large commercial tenants, a parking tax increase will affect more people.
In 2006, a similar proposition to raise the Parking Tax lost badly – in fact, it was the only progressive ballot measure
at the local level to fail. But Mirkarimi pointed out last week that Prop E did not have the support of Muni leaders, and MTA Commissioner Cameron Beach was at the Budget Committee meeting on Friday to express his support. It’s still a question, however, whether enough of a political base exists to pass an increase in the Parking Tax.
Meanwhile, Gavin Newsom has taken a hard Republican line on tax measures – telling the Convention & Visitors Bureau last week that he opposed “all new taxes.” In fact, as Bay City News
reported, the Mayor recently killed an effort that would have brought more affordable housing funds to the City because it would be a tax increase – even though his own staff at the Mayor’s Office of Housing had crafted the proposal.
It’s ironic that Newsom is against all revenue measures as he runs for statewide office, as the problem in Sacramento is Republicans – not Democrats – who oppose tax measures. Newsom will have a tough fight against Abel Maldonado, and he should remind voters how the Republican has been an obstructionist in the budget fights, demanding outrageous concessions for his vote. He’ll have some help with Prop 25
on the ballot, which abolishes the two-thirds supermajority requirement to pass a budget. In many ways, it could be Newsom's only path to victory this November.
But Newsom’s conduct on local revenue measures will make it harder to run that kind of campaign statewide. Even if the Mayor’s consultants are telling him the opposite.