San Francisco’s budget free fall would have more cushion if it weren’t for mounting legal challenges to the city’s business taxes, according to a report released Monday.
Litigation from businesses seeking tax relief is costing San Francisco $415 million — more than half the projected budget deficit in 2025-26 — according to the joint report from the city controller and the mayor’s office.
Two unions that represent city workers, IFPTE Local 21 and SEIU Local 1021, placed blame in part on Airbnb, which sued last year to recover $120 million in back taxes it says were overpaid.
The unions say the city’s deficit could be eased if Airbnb and other companies pay up without putting the city through a legal battle. They rallied Thursday outside Airbnb headquarters.
“We’re going to do what we can to call attention to bad actors who really benefit from San Francisco’s workforce but don’t think they have to pay their fair share in taxes,” SEIU spokesperson Jennie Smith-Camejo said by phone.
An Airbnb spokesperson said in a statement that they could not comment on active litigation but that the company “complies with its tax obligations.”
Lawsuits aren’t the only challenge to the city’s budget. Monday’s report assumes the city will receive a smaller than expected reimbursement from the Federal Emergency Management Agency, at least in the short term, as the federal government and San Francisco haggle over repayments for COVID-era help to the homeless.
“Today’s joint report underscores the sobering reality that San Francisco is confronting one of the most daunting structural budget deficits in its history,” Mayor Daniel Lurie said in a statement.
The city has said layoffs are on the table for the first time in more than a decade.
The joint report shows a slight dip in the budget shortfall, which decreased from $840 million to $817 million after property taxes and some business taxes were higher than previously projected.
But those gains were tanked by litigation challenging how San Francisco calculates gross receipts taxes. These are levied on businesses’ gross receipts for all taxable activities attributable to San Francisco.
The joint report shows that the city’s gross receipts tax liability is expected to grow by $150 million in the current fiscal year, to $415 million. The forecast accounts for the possibility of that liability to grow by as much as $50 million annually in 2025-26 and 2026-27.
Companies have been challenging the tax rates they pay in San Francisco.
Airbnb’s lawsuit contends that the gross receipts tax and Proposition C, the homelessness services tax, were misapplied to the company from 2019 to 2022.
More challenges are coming after voters in November approved Proposition M, aimed at reforming San Francisco’s business taxes. Crafted by an alliance of large and small companies, the ballot measure, which Airbnb supported, reshaped tax rates to be more favorable to those businesses while putting more pain on midsize ones.
Instead of just suing the city, OpenAI and others are employing lobbyists to change how Prop. M is implemented. However the measure is applied will decide the tax burdens of companies across the city — and the fate of the budget.