New Taxes Boost SF Budget as Pandemic Pain Continues

San Francisco released its Five-Year Financial Plan on Wednesday, outlining its economic outlook through Fiscal Year 2025-26 and providing a clearer picture of how the city views its economic recovery. Here are some of the top line highlights from the report. (Note that these numbers are just estimates; an updated forecast will be released in March.)

• San Francisco expects a combined $108.1 million surplus (its first since 1998) across the next two years, driven in large part by FEMA relief funds in addition to returns from the city’s pension system due to the booming stock market. Successful efforts to constrain costs in line with the needs of the pandemic added to the surplus. The following years paint a less sunny picture, with a $38.6 million projected deficit for FY 2024-25 and $148.9 million shortfall the following fiscal year.

• The city’s tourism and hospitality sector is projected to come back at a slower pace than initially expected, with a full recovery pushed out beyond the report’s time frame. Domestic leisure travelers are expected to help lead the recovery through FY 2022-23 before international travelers, business travelers and group and convention travel slowly crawl back to pre-pandemic levels through calendar year 2026. Hotel tax revenue is expected to recover to  $335.2 million by FY 2025-26, with a full recovery not projected until calendar year 2026. 

• Remote work is expected to be a permanent fixture of the city’s work culture, with the report projecting that office workers will telecommute 15% of the time when the in-person return to the office stabilizes in 2023. That means a corresponding slower recovery in business tax revenue, starting with a projected $957.1 million in FY 2021-22 before a 1% rise in FY 2022-23 to $966.7 million. Business tax revenues are expected to reach record levels the following year with revenues reaching more than $1 billion and continuing to grow to $1.13 billion in FY 2025-26. 

• A number of new revenue-raising ballot measures will off set the slower recovery in hotel tax and business tax revenue, including Prop. F, which overhauled the city’s business tax code; Prop. I, which raised real estate transfer tax rates for transactions over $10 million; and Prop. L, which increases taxes at companies with top executive earning more than 100 times the median compensation of their San Francisco employees. 

• Inflation is expected to be at a lower level locally than nationwide because of San Francisco’s lagging economic recovery when compared with other cities. The forecast assumes inflation rates of 3.25% in FY 2022-23, 2.83% in FY 2023-24, 2.71% in FY 2024-25 and 2.56% in FY 2025-26. Compare that to current economic forecasts projecting average inflation of 4.6% in 2021 and 4.4% in 2022.

• The city projects $72.7 million in public health costs in FY 2022-23 due to Covid, but the spending estimates end after that period. Here’s hoping that the city’s economic forecasters have a crystal ball on the future of the pandemic.