Proposition J - Sales Tax IncreaseNovember 1, 2004
What it does
Currently, San Francisco 's Transactions and Use Tax (sales tax) is 8.50 percent. This proposed ordinance would permanently increase the sales tax to 8.75 percent. If dopted, the sales tax increase would raise $8 million during the portion of FY 2004-05 after the tax took effect, and $33.6 million in FY 2005-06. A majority vote is required to adopt this ordinance.
Why it is on the ballot
The City has projected a three-year budget shortfall of over $1 billion as a result of declining revenues associated with the recent economic decline and cost increases for City government. The City is required by the Charter to develop a balanced budget every year. To close this projected deficit, the mayor and Board of Supervisors chose to spread the "pain" through a combination of budget cuts, increased fees, and new tax revenues, including the proposed business and sales tax increases (Propositions J and K on this ballot). The mayor introduced this proposed ordinance as part of that plan, and the supervisors placed it on the ballot.
To balance the City's budget the mayor and Board of Supervisors established a reserve account that could be used to backfill the budget should either the business or sales tax measures be defeated.
Those who support Proposition J state:
- The mayor has developed a budget to address the chronic structural budget deficit over three years through a combination of efficiencies,service cuts, and new revenue sources. Although it would be preferable not to raise taxes, this measure is part of a necessary and balanced solution to a difficult budgetary situation.
- Failure to receive voter approval for increases in Sales and Business Taxes could result in further cuts harming the delivery of City services and aggravating future budgets.
- San Franciscans demand a higher level of services than residents in other jurisdictions. They should be willing to pay additional sales taxes to fund these services.
- With a large working population that resides in neighboring counties but commutes to, works, and shops in San Francisco , a portion of the tax increase will be borne by non-city residents, visitors, and commuters.
Those who oppose Proposition J state:
- San Francisco residents, businesses, tourists, and daytime workers are already highly taxed, frequently at rates substantially higher than other jurisdictions in the state. An increase in the sales tax will add to their burden and decrease San Francisco 's economic and job competitiveness.
- Even if the structural budget deficit is resolved, this is a permanent sales tax increase. The measure should be a temporary tax increase that expires when the economy improves and the City stabilizes its budget.
- The budget deficit should have been resolved by further budget cuts because by some measures the City has, when compared to other jurisdictions, a relatively high level of public spending per resident. The City has to learn to live within its revenue means.
- Sales taxes are regressive compared to other taxes, since they fall hardest on low, moderate, and fixed-income households. Budget problems should not be solved by increases in taxes on those who are already financially struggling.
- Taxing sales of goods will increase their price, and result in fewer purchases by consumers. This is the wrong approach to take at a time when consumer spending is needed to stimulate the local economy.
The controller calculates the per-household annual impact of the sales tax to be $34, based on a median household income of $55,000 and the Bureau of Labor Statistics typical market basket of goods and services subject to the sales tax. An estimated $13,415 of household income for the median household would be taxable under the proposed 0.25 percent increase in the sales tax. The proposed sales tax increase is permanent; there is no sunset provision as found in the four-year business tax increase proposal (Proposition K).
Because sales tax is paid in part by commuters and visitors who purchase goods in San Francisco , not all of the burden will be borne by San Francisco residents. In FY 2004-05, San Francisco residents would pay approximately 36 percent of the revenues raised. Business-to-business transactions, tourists, and daytime workers would pay the remaining 64 percent of the total revenues raised.
As of July 1, 2004 , San Francisco 's sales tax (8.50 percent) is the second highest of the 10 largest cities in the state, exceeded only by Oakland (8.75 percent). The average for these 10 largest cities is 8.08 percent. The sales tax rate is 8.75 percent for cities in Alameda County (including Oakland and Berkeley ) and 8.25 percent Contra Costa and San Mateo counties. The average sales tax for all neighboring Bay Area cities is 8.57 percent. If the proposed sales tax increase is adopted, San Francisco will join the ranks of the highest sales tax cities in the region. The San Francisco sales tax was 8.75 percent for a short period after the 1989 Loma Prieta earthquake, when the tax rate was temporarily raised to fund the unusual needs created in the quake's aftermath.
If San Francisco residents buy certain sales-taxable goods or services in another part of the state, they are supposed to pay San Francisco 's rate. A non-San Francisco merchant usually charges the City's sales tax rate on large value purchases of goods delivered into the city or vehicles registered here.
The sales tax increase is a general tax, meaning all revenues generated will be deposited in the City's General Fund and can be used for any purpose by the City. As a general tax, this measure requires a 50 percent plus one majority to pass, as opposed to a "special tax" (specific programs are funded by the new tax revenues) which would require a two-thirds vote. Concurrently with this proposed ordinance, a separate companion policy statement (Proposition O) indicating the proposed priorities for the sales tax revenues is on the ballot. For more information on this policy statement, see SPUR's analysis of that measure. San Francisco will contract with the State Board of Equalization to administer and collect the increased sales tax revenue.
Sales taxes are often considered to be somewhat more regressive than other taxes on individuals, meaning that they fall harder on lower-income individuals. This is because low-income individuals tend to spend a larger portion of their incomes on consumption of goods, so the taxes they pay are a higher portion of their income compared with wealthier individuals. The regressive tendencies of the sales tax, however, are offset by other factors. First, some low-income residents may benefit more from government programs funded by the tax, meaning their payments are offset by government services they receive. In addition, many necessary goods are exempt from the sales tax, including groceries, housing, medical care, and some transportation expenditures.
Increasing the sales tax is not an ideal solution to our budget problems. However, we believe that this measure is a reasonable part of a balanced solution to a budget deficit of unprecedented proportions. This solution spreads the burden between business, consumers, and those who pay fees for government services, and includes important steps to lower government costs.
SPUR believes it is preferable to raise taxes as a part of a multifaceted solution than to cut essential government services such as public health, fire protection, and services to low-income families.
SPUR recommends a "Yes" vote on Proposition J.