In the world of real estate, “volatility” is an important word. It should serve as a warning or a reason to be prudent even when things are going well, because, as any baseball player knows, all hot streaks come to an end. But this is San Francisco, after all, the city that knows how to shake up the status quo.
We’ve had years and years of epic property sales figures, both commercial and residential, so why not squeeze the teat a little harder and spread the wealth around?
Enter the transfer tax, one of the city’s most important revenue streams. When a property changes hands, it’s taxed a certain percentage based on its sale price. The money goes into San Francisco’s General Fund, which means it can be used for any budgetary needs. When the real estate market is hot, which is has been for years now, the transfer tax brings in massive sums. Since the 2011-12 fiscal year, revenue has exceeded $200 million annually, with a peak of $314.7 million in 2014-15, according to the Assessor-Recorder’s Office, which collects the tax.
San Francisco voters have taken kindly to transfer tax increases. Since 2008, there have been three attempts to increase the rate. Two passed, although the most recent effort, 2014’s Proposition G, failed. Prop. G was much more aggressive with its rate increases than the previous two or the new measure, Proposition W, that will appear on November’s ballot.
Supervisor Jane Kim, who’s running for the state Senate against colleague Scott Wiener, authored Prop. W. It has widespread support on the board, especially among the progressive bloc. And it’s easy to see its appeal, as it would only impact property sales of $5 million or more and create a new tax tier for sales exceeding $25 million. (The vast majority of sales that high are for commercial, not residential, properties.)
Things get really interesting when you break down the numbers. In the fiscal year that ended June 30, the Assessor-Recorder’s Office collected $273.7 million in transfer taxes. Only 3 percent of those transactions involved properties valued at more than $5 million. However, those transactions accounted for 72 percent of the total revenue, or about $197 million. So it’s easy to see where the volatility comes into play.
As it stands, the transfer tax rate for a property sold for between $5 million and $10 million is 2 percent. Prop. W would increase it to 2.25 percent. Anything more than $10 million but less than $25 million would go from 2.5 percent to 2.75 percent. And the new $25 million-plus tier would be taxed at 3 percent.
Kim wants San Francisco to make City College free for everyone. The transfer tax increase would theoretically pay for that and also enable the city to maintain street trees (something that will also appear on the November ballot, thanks to Wiener).
Both pursuits are admirable and likely have widespread voter support. But the catch with Prop. W is there’s no guarantee any transfer tax revenue would go to either cause. For that to happen, Prop. W would have to be a targeted tax, and thus require two-thirds of the vote to pass. Since it’s just a general fund tax, it needs a simple majority to become law.
Kim knows this, and that’s why she introduced a resolution recently in which the Board of Supervisors endorsed her idea to make City College free. It is, of course, non-binding, but it sets the tone if the transfer tax increase passes in November. Essentially, it’s political pressure, which is far from a guarantee.
If you’re curious what the person charged with collecting the transfer tax thinks about this latest push for an increase, Assessor-Recorder Carmen Chu says she’s not ready to take a position. But if history is any indication, she might be wary no matter what.
Chu was a member of the Board of Supervisors before being elected assessor-recorder. In both 2008 and 2010, she opposed the transfer tax increases that voters passed. She wrote for the opposition in 2008 that “[a]t a time when the economy is showing signs of slowing down, it is important not to discourage economic activity. Taxing more for property sales could possibly do just that.”
Of course, back then, the Great Recession was just settling in, and now San Francisco is a darling of economic prosperity. But it won’t always be that way. In fact, there are already signs of a slowdown, and voters will need to decide if they’re willing to gamble with other people’s money.