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Can San Francisco afford reparations?

LLater this year, San Francisco regulators will consider an ambitious plan to bring reparations to black residents to compensate them for the lingering effects of slavery and recent discriminatory public policies. While other Cato scholars have commented more generally on national and San Francisco reparations, here I will focus on the fiscal implications and the local economic impact.

An analysis of the plan by the Hoover Institute estimates its cost at $200 billion, with most of the cost attributable to the recommended $5 million cash payment to each eligible person. Since the recommendations have not yet been fully finalized, Hoover’s estimate is necessarily speculative, but appears to be the best available. The San Francisco Reparations Committee has yet to produce a financial analysis, stating that “it is not its job to determine how San Francisco’s atonement and repairs are to be funded.”

Assuming the cost is around $200 billion, can the city and county governments fund the reparations plan? This is only possible through a combination of large-scale borrowing and tax increases.

In 2022-23, San Francisco’s overall fund budget is $6.8 billion. The rest of the government’s total $14 billion fiscal footprint comes from self-sustaining businesses like San Francisco International Airport (SFO) and the municipal water system. There may be an opportunity to increase user fees to fund these businesses, but a large increase could hamper the competitiveness of services (like SFO) that have alternatives (like nearby airports).

Much of San Francisco’s general fund income comes from non-tax income, primarily from state and federal aid. Tax revenue accounts for just $4.4 billion of the fund’s general income. Funding a $200 billion reparations program in one year would result in a more than forty-fold increase in taxes.

A more realistic approach would be to issue bonds to cover the cost of reparations spread over 30 years. However, such borrowing faces two major obstacles. First, general promissory notes issued by the city and county must be approved by two-thirds of local voters. Second, the California Constitution limits the purpose of such bonds to the “acquisition and improvement of real estate.” simple majority.

If reparations advocates could overcome these hurdles. The San Francisco government could then fund the program and pay the debt service by imposing an additional $285 billion property tax on San Francisco taxable property. Assuming the bonds mature over 30 years and pay a coupon of 4%, and assuming that the appraised values ​​increase by 4% per year, the additional tax burden should be around 2.4% of the appraised value.

This additional levy would roughly triple ad valorem property taxes citywide. It is reasonable to expect that this higher tax rate would put significant downward pressure on property values, potentially breaking the assumption made above of a 4% compound annual property appreciation rate. In this case, the tax rate would have to rise even further.

In fact, the effect of such a large tax increase could be to send the city’s economy into a “fate loop” recently described in the San Francisco Chronicle as follows:

Connected forces catch the city in economic freefall: workers mostly stay away; offices are empty; company roller shutter; Mass transit is severely restricted or even bankrupt, making it even more difficult for low- and middle-wage workers who enable restaurants and small businesses to operate, resulting in large budget shortfalls from falling tax revenues that jeopardize numerous city services and trigger mass layoffs of city workers and rip apart the social safety net, causing more people to leave.

In the week after the Chronicle mentioned the possibility of a Doom loop, the risk of that scenario seemed to increase with the assassination of a high-profile tech executive downtown, the bludgeoning of a former fire commissioner in the Marina district, and the news about the city The commercial property vacancy rate had reached a record 29.5%.

A big tax hike could be the last straw. While there has been much talk of Californians moving to other states, there has also been a lot of movement within the state. Bay Area residents have moved to the Sacramento area to lower their cost of living, while San Francisco residents are moving to suburbs with more space and better schools.

Even those who like California’s liberal politics and are willing to pay higher income and sales taxes to live in the Golden State have options. And since San Francisco covers just 47 square miles, residents and businesses wouldn’t have to move far to avoid reparations policies and the additional property taxes that would be required.

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This article originally appeared on the Cato at Liberty blog and is reprinted with permission from the Cato Institute.

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