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Is San Francisco’s Prop C Tax The Solution to Homelessness?

To many, it may seem like affordable housing is becoming a phenomenon of the past. As it becomes increasingly difficult to profit off the creation of low-cost housing, San Francisco imposed a business tax that would raise funds for homelessness services and relief. The pandemic, however, has exposed many flaws in the tax, making the future of this funding shaky. 

The Prop C Tax

Passed in 2018, Proposition C imposes an additional tax on individuals and businesses in San Francisco that earn more than $50 million (total income) annually in order to relieve homelessness and create affordable housing. Of the approximately 13,000 businesses located in San Francisco, only about 300-400 are affected by the Prop C tax.

The tax rate ranges from 0.16% to 0.65%. Companies that earn gross receipts in excess of $50 million annually pay an additional tax on the excess amount at rates ranging from 0.175% to 0.69% depending on the type of business activity. For example, if a business’s annual gross receipts were $58 million, the additional tax would apply to the $8 million earned in excess of $50 million. 

Also known as the Homelessness Gross Receipts Tax, there are few who are exempted from the Prop C tax. According to the City and County of San Francisco, this consists of certain nonprofits and businesses exempt from local taxation (such as banks and insurance companies), receipts that are exempt from the gross receipts tax, and receipts subject to the City’s Early Care and Education Commercial Rents Tax. 

Prop C was created to generate about $250 million to $300 million annually for the Our City, Our Home Fund. The money collected from Prop C creates a 28 to 33 percent increase to the $900 million generated annually from the gross receipts tax. The money is distributed as follows:

  • 50% goes to the Mayor’s Office of Housing and Community Development (MOCHD) to provide permanent, affordable housing to the unhoused.

    • An additional 15% goes to the MOCHD to help those at risk of becoming homeless or those who have recently become homeless.

  • 25% goes to the Department of Public Health to create mental health services for those experiencing homelessness and severe mental health issues.

  • 10% goes to the Department of Homelessness and Supportive Housing (HSH) to provide short-term housing and hygiene necessities to individuals experiencing homelessness. 

Pandemic Impact 

The tax was designed to work best in a pre-pandemic society: According to The San Francisco Standard, “the tax is calculated based on the percentage of a company’s employees who work in the city.” When the pandemic hit, confusion erupted as to how these businesses should be taxed. Many workers were forced to work from their homes outside of San Francisco, or made the choice to move out of the city for their safety. Additionally, businesses moved out of the city entirely to maximize their profits as the economy suffered. This situation greatly reduced the number of employees working in San Francisco. As a result, firms had an incentive to keep as many employees as possible at home to reduce their Prop C tax rate. 

Due to the pandemic-focused shift in work culture, revenue from the Prop C tax fell 45% between 2019 and 2020. Originally bringing $394 million in 2018, the tax only generated $218 million in 2020, which is below the predicted lower margin of earning $250 million from the tax annually. During that same time period, there was a 12% decline in revenue from that tax that applies to all San Franciscan businesses. These numbers emphasize the extent in which workers and their employers left the city during the pandemic. Alan Auerbach, a tax economist at UC Berkeley explained, “covid was a shock to the system, and companies have found they can operate without employees in the city. It makes SF tax policy even more problematic, because now they can’t assume that companies will need to have their workers there.”

Initially, it was predicted that the tax would only result in about 725 to 825 job losses and a 0.1% decline in the city’s gross domestic product. The pandemic greatly increased those projections. 

Future Issues

The rise of remote working has made it easier than ever for major companies to relocate, as it is no longer necessary for all employees to make the move with the company. So, the Prop C tax may encourage companies to relocate to other cities, which could be a blow to San Francisco’s economy. According to The San Francisco Standard, “business taxes are the second largest individual source of revenue for the city, behind property taxes.” 

Prop C’s Controversy

Some businesses paying Prop C have advocated against the tax, saying that money is not the solution to homelessness. Stripe, a company that pays the tax, put out a response against Prop C following its passing in 2018, saying, 

“If homelessness was just a question of money, this issue would already be solved… Homelessness is the product of a complex web of causes, and solutions require careful interventions. Like many others, we do not believe that Prop C — which would bring San Francisco’s annual expenditure to $770 per person per year — will effectively solve this problem. While well-intentioned, it is San Francisco’s largest-ever tax increase, and comes with no systemic changes or effective accountability.”

Marc Benioff, founder of Salesforce and supporter of Prop C, suggested that those who oppose the tax are amoral. 

The Tax’s Impact on Homelessness

Because the tax is relatively new, it is difficult to tell whether or not the funding is significantly aiding those experiencing homelessness. As stated on SPUR, an online voting guide, the Department of Homelessness and Supportive Housing estimates that Prop C “would house 5,000 homeless people, provide outreach and mental health services to 10,000 people, assist 30,000 people with eviction protections, legal counsel and short-term assistance, and expand shelter beds by 1,000 within 10 years.” Yet, there are currently 1,000 people on the city’s 90-day emergency shelter waitlist, and half of them have been waiting for over 877 days. 

The Prop C tax has had a rocky start; the opposition to the tax and the pandemic have highlighted some of its major weaknesses. So, is money the solution to homelessness? Or would it be more effective to reframe our cultural beliefs surrounding homelessness and reform the systems that often result in the issue? 

Sources:

https://sfstandard.com/business/revenue-from-homelessness-tax-plummeted/

https://www.spur.org/voter-guide/2018-11/sf-prop-c-business-tax-homeless-services

https://stripe.com/newsroom/news/prop-c-patrick

https://sftreasurer.org/business/taxes-fees/homelessness-gross-receipts-tax-hgr

https://san-francisco-shelter-waitlist.herokuapp.com/

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