Controversial proposal is aimed at boosting residential building activity, construction employment and the downtown economy
With a projected $643 million two-year budget deficit looming and layoffs of city staff already ordered, San Francisco’s fiscal situation might not seem conducive to enacting a cut in the transfer taxes that are imposed on high-value property sales.
But that’s what Mayor Daniel Lurie and District 5 Supervisor Bilal Mahmood have proposed as part of a still-forming legislative package that is aimed at fueling residential building activity, stimulating construction employment and energizing The City’s downtown economy. Their controversial Balanced Update to Incentivize Local Development Act proposal, revealed in late February, would halve transfer taxes on property transactions of $10 million or more, returning rates to what they were before San Francisco voters doubled them through Proposition I in 2020.
The announcement of the BUILD Act also said that to “offset general fund revenue impacts over time,” their package included a request for the drafting of a November ballot measure to ensure transfer taxes are paid on more transactions, including by potentially eliminating a tax exemption for certain parties that are foreclosing on properties or accepting deeds in lieu of foreclosure. That additional proposal for generating offset revenue has not yet been unveiled.
While the Board of Supervisors can approve a transfer-tax cut, voters would have to approve a tax increase. Legislation regarding the proposed transfer-tax cut is awaiting a Board of Supervisors committee hearing. The plan is for the tax rate for properties from $10 million to $25 million to drop from 5.5% back to 2.75%. For properties of $25 million or greater, they would go from 6% to 3%.
As part of the BUILD Act announcement, Luire also said city departments had been convened to determine “a more effective source of funding” for affordable housing within three months. A plan from that process has not yet been publicly identified.
Led by the Mayor’s Office and involving multiple agencies, the effort is considering options including a bond measure, raising the limit on the city’s housing trust fund and using capital-raising tools such as enhanced infrastructure financing districts and certificates of participation. In the meantime, city officials are going through the painful process of preparing a budget from which the mayor has called for $400 million in annual spending cuts, including $100 million from the elimination of 500 positions.
Recent budget hearings have been packed with clients and providers of services for older and disabled people, clinics for seniors and youths, supportive housing and workforce development seeking to avert the loss of their funding. Lurie must submit a budget proposal by June 1. A March 31 report from the City Controller’s Office estimated that simply halving the transfer tax for purchases of $10 million or more would cost The City about $390 million over four years.
The report forecast that revenue to the general fund would drop by $93.8 million in fiscal year 2026-27, $96.4 million in fiscal year 2027-28, $98.8 million in fiscal year 2028-29 and $101.2 million in fiscal year 2029-30. Those projections did not include any proposals to offset the loss of revenues, however, and the Controller’s Office is continuing to refine its forecast, including with regard to changes to the number of property transactions that might occur with a tax cut.
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” Among other things, Mahmood has said the proposed tax cuts would stimulate housing projects by reducing housing-construction costs by around $32,000 per unit.
“The BUILD Act package is revenue neutral and will not negatively affect the deficit,” he said. “It restructures the tax code to incentivize housing construction and labor jobs that are currently stalled while ensuring we will collect at minimum the same transfer tax revenue we collect today. ” Reducing the transfer tax “will actually help accelerate transfers of properties, and accordingly the Controller’s Office will incorporate that increase in transaction revenue as an elasticity factor,” Mahmood said.
Some opponents of the tax cut are not convinced that revenue neutrality will be achieved.
“We haven’t seen any numbers to back that up,” said Kyle Smeallie, the policy director at the San Francisco Community Land Trust, an affordable-housing provider. “When we’re facing a massive budget deficit, to repeal a revenue source that’s bringing hundreds of millions of dollars — it makes absolutely no sense. ” The City needs more money for affordable housing given the challenge of meeting state-mandated housing goals, Smeallie said.
Smeallie — previously the chief of staff for former San Francisco Supervisor Dean Preston, who sponsored Prop. I for the ballot — is one of the sponsors of the Affordable Housing Guarantee Act, a proposed November ballot initiative that runs counter to what Lurie and Mahmood have put forward. Proponents are now gathering signatures for that measure, which generally would keep The City’s transfer tax for transactions valued at $10 million or more at the current level.
It would also mandate that Prop. I revenue be spent on the protection, preservation and production of affordable housing. Smeallie and others have argued that in approving Prop. I, voters wanted the money collected to go to housing.
But that measure was written without such a limitation, and proceeds from the tax have gone into the general fund, from which advocates say some $200 million has been used for housing. Mahmood said that the housing activists’ proposed ballot measure causes him concerns “about setting aside hundreds of millions of dollars from the city budget without a commensurate way to balance the budget” and “pitting workers against affordable housers,” as well as clauses that could interfere or cause confusion for voters with other housing efforts.
Bilal Mahmood Kyle Smeallie San Francisco Community Land Trust
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