What Revenue Sources Meet Transit Riders’ Needs?

SFTR’s Local Funding Working Group has spent the past six months understanding Muni’s existing funding challenges and identifying potential San Francisco-specific revenue sources. This blog is the second of three in the series, and will explain and evaluate potential revenue sources for transit funding.

Accompanying this document is a Revenue Sources Matrix that gives a high level summary matrix of each of these concerns across a number of possible revenue sources, ranked in red-yellow-green.

Source: SFMTA

In our last piece, we covered why Muni desperately needs long term, sustainable, and significant additional funding to sustain existing service and repair its aging infrastructure. But not all revenue sources are created equal. Our Local Funding Working Group used five main criteria to evaluate potential revenue sources:

Annual revenue generated: SFMTA’s structural deficit is quite large, so solutions must also be sized accordingly. We prioritized measures that could generate above $50M/year in order to meet the scale of the crisis.

Reliability of funding: Planning, providing, and growing transit is a long-term project, so revenue sources that do not dependably grow over time or which fluctuate greatly from year to year inhibit Muni’s ability to deliver top quality service. An inability to find revenue sources that are likely to grow with ridership sets SFMTA up for a new structural deficit in the future.

Equity: Funding solutions ideally should be progressive, where people with greater incomes are taxed at a higher percentage of their income than lower income people. At minimum, revenue sources should not increase existing inequities.

Mode shift: To meet our urgent climate goals and to provide a healthier environment, revenue sources will ideally encourage wider social shifts toward sustainable modes of transportation, with a primary focus on modeshift away from low-occupancy car trips.

Political feasibility: In order to make it to the 2022 ballot, revenue measures should be allowed by existing state and federal laws, have the support of SFMTA and City Hall, and have a good chance of passing at the ballot box.

Potential Revenue Sources

We considered many revenue sources, using the San Francisco Transportation 2045 Task Force Report as a baseline. Revenue numbers listed below come either from the 2045 Task Force or from more recent SFMTA estimates. Below are brief descriptions and evaluation of the most viable revenue sources.

General Obligation Bond

SFMTA and the City of San Francisco have discussed issuing a new $400M general obligation bond (“GO bond”) under the city’s existing charter. Billed as part of the city’s existing bond plan, a transportation GO Bond would be covered by the city’s existing revenues, generating an average of $56M a year for 7 years while not imposing any new tax on voters. Revenue from the bond could only be used for capital improvements, including addressing maintenance backlog, and could not be used for operational expenses. Once passed, the revenue would be effectively guaranteed.

The last major transit GO bond passed in 2014 ($500M) with 72% of the vote. San Francisco voters have passed all but one GO bond since 2006. A $400M transportation bond is listed as part of the City’s Capital Plan, which caps the total monetary value of all issued bonds at any given time at 3% of the total assessed value of taxable property in the city. As such, a new GO bond has a chance of passing and providing reliable funding for major capital projects until 2029.

Mello-Roos Community Facilities District

SFCTA and SFMTA have evaluated a Mello-Roos Community Facilities District (or CFD, referring to special districts established in California to raise funds for public works and services) and estimate a potential of up to $180M annual revenue, which could be used for capital or operating expenses. Such a district would need 2/3rds approval at the ballot box as it is a dedicated tax for Muni.

There are two phases to the CFD: one is the creation of the district itself which is done by the Board of Supervisors, and the second is tax levied on the district. Once established, the CFD creates a tax on the value of land, and can be based on properties of that land, including use. In order for a new CFD to not operate like a parcel tax, the CFD would need to be crafted with equity in mind.

The advantage of implementing a CFD rather than simply levying the tax is that it provides a framework for future additional taxes to fund additional service improvements using the same district. With this pre-set source to draw from, SFMTA would not necessarily be competing with other city priorities in future revenue measures. It’s unclear if a CFD could be ready in time for the 2022 ballot, and SFMTA could move forward with a special parcel tax using the same tax structure without implementing the CFD itself should the drawing of the district itself prove problematic.

Vehicle License Fee Increase

Vehicles are assessed a 0.65% tax every year during registration, based on the value of the car. The city has prior approval from the state to raise the collected tax to 2%, if approved by 50% of the voters, which could raise an additional $73M. In 2014, Proposition B provided stop-gap funding to SFMTA with the assumption that the license fee would be increased to 2%. The Mayor can cancel that stop-gap funding as soon as an increase is approved. Mayor Breed has indicated that she is likely to do so. This would reduce new revenue by an estimated $30M, to $43M a year. It is important to note that these funds go to the city’s general funds rather than directly to SFMTA, and are therefore subject to the discretion of the Mayor and Board of Supervisors.

One major benefit of a vehicle license fee would be that it encourages modeshift toward more sustainable forms of transportation by increasing the cost of owning a car. Car ownership is heavily subsidized, from investment in roads and highways to the largely free cost of parking in San Francisco. A vehicle license fee would not only make Muni more desirable by funding increased service, it would also disincentivizing driving.

Sales Tax Reauthorization

The Proposition K ½ cent transportation sales tax, administered by the SFCTA, brings in approximately $110M a year (before the pandemic) in transportation funding. The SFMTA is the largest recipient of Prop K dollars, though other city agencies and regional transit operators are also eligible for many of the funding programs. It is also a reliable source of funding in the medium-term, as the current expenditure plan covers the period of time through 2034. A new expenditure plan is scheduled to go before voters in 2022, and needs a ⅔ majority to pass. The new expenditure plan would supersede the current Prop K expenditure plan. If the new plan were not passed by voters in 2022, the current Prop K expenditure plan would still be in place and the sales tax would continue.

As a sales tax, this funding source is regressive, with low-income residents generally paying a significantly higher percentage of their income on sales taxes. However, the expenditure plan is heavily focused on investments that disproportionately benefit low-income households, including 66% on transit and 8.6% on paratransit. SFMTA’s structural deficit factors in future sales tax revenue. If a new expenditure plan is not approved, the structural deficit would increase. As such, approval of a new expenditure plan is essential.

Gross Receipts Tax

There are a variety of potential gross receipts tax options, centered around either increases to the rates of the current gross receipts tax in San Francisco, or expanding the base to include more payers. The current tax is varied by industry with tiered rates. A general increase in gross receipts was just passed in 2020 via Prop C, and there is little political appetite to further change this part of the City’s tax code. However, gross receipts taxes are considered generally progressive taxes and could generate significant revenue as Proposition C did for homeless services and housing.

Parcel Tax

In its typical form, a parcel tax is a flat-rate tax paid annually, on all 200,000+ San Francisco parcels. San Francisco has passed parcel taxes in 2008, 2010, 2012 and 2018 to fund education. SFMTA has studied a flat parcel tax of $50-$250 per parcel, generating a projected $10-$50M per year. This tax would be flat and regressive, with lower-valued properties paying the same amount as higher-valued properties, and with pass-throughs to tenants. Parcel taxes are reliable once passed, but it is unlikely that very many new parcels will be created in San Francisco in years to come, and revenues generated are thus unlikely to grow with SFMTA’s budget.

One potential exception would be a special parcel tax based on square footage instead of a flat rate per parcel, effectively instituting the Community Facilities District without creating the district itself. A variable square foot rate across building types and zones would allow for a more equitable structure, as well as additional revenue potential, effectively a Community Facilities District without establishing the district itself.

Additional ½-Cent Sales Tax

One of the most straightforward measures considered was an additional ½ cent sales tax, which would raise another $105M annually. Currently, SF’s sales tax rate is 8.5%, including 1.25% in local sales tax. SB 566 authorizes a combined city and county sales tax rate of up to 2.0%, which leaves an unused local authorization of 0.75%. However, sales taxes are regressive, with lower income residents paying a larger share of their incomes than those with higher incomes. New sales taxes have also recently failed at the ballot box, with Proposition K failing in San Francisco in 2016 after only getting 35% of the vote.

Payroll Tax Increase

This would increase the City’s current payroll tax rate, which is imposed on a business’ total payroll. Taxes can be deducted from wages or paid by employers. San Francisco is in the middle of phasing out payroll taxes and moving entirely to gross receipts. It does not seem politically desirable or feasible to reverse this direction, or to maintain a system where both taxes are in place at once.

Recommendations

With between $80 — $200M needed annually to close the operations funding gap and another $225M needed to close the capital works backlog, it’s clear that one funding measure alone will not solve the fiscal problems SFMTA faces. Federal, state, and regional funding, often restricted to capital expenses, is also needed to create a fast, reliable, and affordable transit system in San Francisco that is equitable and accessible to all. However, a local transit operations funding measure could provide some or all of the revenue to close the operating gap and restore pre-pandemic service.

After evaluating potential funding measures based on revenue generated, equity, reliability, modeshift, and political feasibility, the San Francisco Transit Riders Local Funding Working Group supports three potential new revenue initiatives that would help substantially close SFMTA’s operating deficit in 2022: a Community Facilities District with an equitable special parcel tax; increasing San Francisco’s Vehicle License Fee to 2%; and a gross receipts tax.

In addition, we recommend the support of a $400M G.O. Bond and the reauthorization of the ½-cent sales tax to help address critical infrastructure needs that are essential to a well-functioning transit system.

Any one of these measures on their own will require a lot of work to build the political will to make them happen, as well as the effort to win at the ballot box — and we hope to pass three measures next year. We are engaged on the ½-cent sales tax (Proposition K) expenditure advisory committee, and we are working with city and community leaders to chart the way forward. Our final piece in the series will detail how to get these funding measures to the ballot and approved by voters.

Additional revenue sources such as an income tax, congestion pricing, and a variety of parking taxes were also evaluated. We didn’t discuss them here because they’re not achievable as ballot measures in 2022. However, you can view our evaluation of them on our Revenue Sources Matrix.