San Francisco about to Face a Legal Morass After Voters Approve Proposition C

Voters in San Francisco adopted Proposition C earlier this month, adding another gross receipts tax to the city’s businesses. It is a particularly pernicious form of taxation enjoying a resurgence at the state and local levels, leaving San Francisco about to face a legal quagmire that threatens to halt the tax’s enactment.

Proposition C introduces a new gross receipts tax on businesses with more than $50 million in gross receipts within the city, with rates varying by industry from 0.175 percent to 0.69 percent. Proposed to fund services for the homeless, the tax adds to San Francisco’s broader gross receipts tax, which applies rates ranging from 0.16 percent to 0.65 percent for firms with more than $1 million in gross receipts.

The proposal, passing with only 60.5 percent of the vote, faces legal hurdles as a result of California’s constitutional requirement that many of the state’s taxes must be approved by a two-thirds vote of the people.

In California, governments must receive voter approval to increase or enact local taxes. If the tax is dedicated to a specific purpose (in Proposition C’s case, support for the homeless), levied by a special district, or a property tax, it is considered a special tax and requires a two-thirds majority to be approved. Otherwise, the proposal is considered a general tax and may pass with simple majority approval.

The dispute over Proposition C centers around whether voter-initiated measures are included in the two-thirds approval requirement, or if that standard only applies to measures introduced by government officials.

This isn’t the first time this question has been raised: litigation is pending over a separate initiative to enact a commercial rent tax, which also received only a simple-majority approval by voters.

The day after Proposition C was approved, the San Francisco Controller notified the San Francisco Board of Supervisors that his office would not certify the expected revenue from the tax for appropriations until the legal uncertainty is resolved. Mayor London Breed (D) defended the measure, introducing an ordinance to seek a court order to authorize the simple-majority threshold for passing the tax.

Breed is relying on a 2017 memo by the San Francisco City Attorney’s Office, which argued that the voting threshold for voter-initiated measures is a simple majority under the California Constitution. The memo rests on a decision by the California Supreme Court in California Cannabis Coalition v. City of Upland.  Crucially, the decision did not directly discuss the issue of voter-initiated measures but decided whether a voter-initiated measure can be held during a special election. The City Attorney’s Office argues that the Court treated legislatively-introduced taxes and voter-initiated taxes differently in that case; the latter measures may be considered during special elections, although the former measures may not. This implies, the memo argues, that the two-thirds voter threshold only applies to legislatively-introduced tax proposals.

The lack of case law directly addressing the matter suggests that the city should expect a legal battle before the measure is implemented, a battle they are at risk of losing.