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City says homeless tax will generate millions but cost jobs

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City Hall economist says Proposition C will reduce homelessness but can’t predict how much

Sharp Budget Cuts Loom For All Sectors Of California’s Infrastructure Photo by Justin Sullivan/Getty Images

On Wednesday, the City Controller’s Office released its report on the potential effects of Proposition C, a November ballot measure that will increase gross receipts taxes by 0.5 percent on companies with more than $50 million in revenue and put the money toward homeless service.

According to city economist Ted Egan, Proposition C will almost certainly reduce homelessness in the city and create a huge budget boost for city services. It will also create some new jobs and burnish the city’s tourism.

However, Egan also predicts that the city’s biggest companies will respond to its passage by shipping jobs elsewhere, resulting in a small but measurable 0.1 percent decline in employment growth, or a few hundred positions per year.

Here’s the breakdown:

  • The tax would generate a surprisingly large amount of city revenue: “The Controller’s Office has estimated that the proposed tax would generate $250 - $300 million per year.” From 2017-2018 the city spent $380 million on homeless services, so that sum represents a potential 78-plus percent boost. It’s also a third of the city’s present business tax boon of $900 million annually.
  • It would affect a small number of companies in all: “The Controller’s Office has estimated that 300 - 400 local businesses would be affected by the tax, out of more than 13,000 current payers of the gross receipts tax.”
  • Egan projects that the increase in funding will lead to a decline in homelessness: However, he also writes that it’s impossible to predict by how much, as there are too many human variables to account for.
  • Proposition C would also create jobs and juice the local economy, according to Egan’s predictions: “The increased spending on housing and related services will stimulate those sectors of the economy, leading to positive multiplier effects on other industries. [...] A reduction in homelessness is likely to increase the attractiveness of the city to tourists, residents, and commuters.”
  • However, companies would probably respond by jettisoning jobs elsewhere, for a net loss overall: “This mix of costs and benefits yields a net average annual loss of of 725-875 jobs, over a twenty - year forecast period, and a city GDP loss of $200 - 240 million per year, in 2017 dollars.” Job loss may take the form of reduced hiring or simply moving positions to other cities. The biggest losses would be in retail, hospitality, and finance.
  • Egan notes that this is a relatively small change overall: “These impacts are small in the context of the city’s job market and economy, equal to a 0.1 percent difference, on average, over 20 years.”

It seems a little unfair that the negative effects of the law in human terms are more easily quantified than it’s benefits, but it turns out multi-million dollar markets are easier to anticipate than homeless populations.

Egan also points out that local businesses have recently received large federal tax cuts and “it is likely that the 14 percent income tax cut would outweigh the proposed 0.5 percent gross receipts tax increase,” a critical point for the pro-Proposition C campaign.

However, since all US companies got the same federal tax cut, there’s still incentive to shuttle jobs elsewhere.