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SF's Hotel, Business Tax Declines Are Worse Than Expected

  • The SF Controller's Office identified a new $115.9 million budget shortfall in the current fiscal year, owing to a slower-than-expected recovery in key sources of tax revenue

  • Business taxes and hotel taxes are expected to come in 12% and 34% below budget, respectively

  • Mayor London Breed and the Board of Supervisors recently signed a precariously balanced, $13.1 billion budget that assumed a steady economic recovery

San Francisco's budget woes are wearing on with worse-than-expected drops in tax revenue, according to a new estimate by the SF Controller's Office.

In a letter to Mayor London Breed and Board of Supervisors President Norman Yee, SF Controller Ben Rosenfield projected a $115.9 million budget shortfall in the current fiscal year owing to slow rebound in hotel and business tax revenues.

The shortfall "is predominantly comprised of weakness in key tax and fee revenues driven by a slower economic recovery than was anticipated in the adopted budget," Rosenfield wrote.

Just weeks ago, Mayor Breed and the Board of Supervisors signed a precariously balanced $13.1 billion budget, which relied on several assumptions about the City's economic recovery and the passage of Prop F, a business tax overhaul recently approved by voters.

The new shortfall reflects an anticipated 12% decline in business taxes, which include registration fees, payroll taxes, gross receipts taxes and administrative office taxes, and a worse outlook compared to earlier projections. In August, the Controller projected payroll tax and gross receipts tax revenues to fall by 10.2% and 7.7%, respectively.

Remote work is a major contributing factor in the business tax declines, with around 70% of the City's payroll tax base derived from office-based sectors, such as information and professional services, that have switched to telecommuting. Payroll taxes, and in some cases gross receipts taxes, are based on the number of employees that physically work in San Francisco.

Likewise, hotel tax revenues are taking a worse-than-expected hit.

Owing to a sluggish recovery in tourism and business travel, hotel tax revenues will come in 34% below budget, and 67% below actual revenues in the last fiscal year, according to the new estimates.

The Controller's revised projections assume that attendance at key revenue-generating events, such as major conventions and sporting events, returns to pre-pandemic levels by summer 2022.

Hotel taxes allocated to the City's general fund are projected at an anemic $82.8 million in fiscal 2020-2021, and business taxes are projected at $727.5 million. Business and hotel taxes are SF's second and third-largest sources of tax revenue in a typical budget season, behind property taxes.

Local sales tax is projected at $171.3 million, or 6.8% below budget, partly due to the drop in tourism.

One small bright spot for SF's budget: Property taxes are expected to come in 2.4% above budget, at about $2 billion, owing to changes in the value and timing of certain tax refunds.

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Image by Jake Buonemani
Image by Rasmus Gundorff Sæderup

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