By Tim Redmond

THE WAY MAYOR Willie Brown describes it, crafting next year's city budget involved ugly, painful – and unavoidable – decisions. There was no real choice, he told the Board of Supervisors: the collapse of the dot-com boom, and the overall national recession, had forced him to reduce city services and cut jobs.

Among other things, he insisted, the loss of tax revenue required him to eliminate 61 low-paying city jobs, to lay off people who washed and folded laundry at Laguna Honda Hospital – something he described as being "like laying off my mother."

But that's not the real story.

The truth is, San Francisco doesn't have to lay off 61 laundry workers. The mayor doesn't need to cut $4 million from children's services or slash spending at the Department of Public Health. There's no reason to abolish paid time off for home health care workers or eliminate tree planting, cut eviction-protection programs, or raise fees for street fairs.

There's plenty of money to cover essential services in this wealthy city – if the mayor and the supervisors are willing to make the real tough decisions. If they're willing to cut the real fat – and make the rich share the pain. But the mayor's proposed budget doesn't do much of that.

Instead it allows the highest-paid city employees to prosper while workers at the bottom of the economic scale face layoffs or givebacks. It cuts services for the poor while protecting wealthy individuals and big businesses from any significant tax increases.

In essence, the budget Brown has presented puts the city on record as endorsing the same type of economic policy that's come out of Washington, D.C., and Sacramento in the past 20 years. It's easy on the fat cats, the patronage players, and the high-salaried bureaucrats – and it's harsh on the homeless and the sick, the seniors and the kids, the low-level city workers and the public they serve.

A Bay Guardian analysis of the fiscal year 2002-03 city budget has found plenty of places where new revenue can be raised to cover city services – and plenty of fat that can be cut to preserve essential programs. Consider:

• San Francisco may be in a mild recession, but it's still a rich town – and the rich are getting richer. In the past eight years the total pay of the 10 highest-compensated executives in this city has risen (accounting for inflation) by 91 percent. The 10 biggest businesses in town earned a combined $12.9 billion in profits last year. In other words, there's plenty of money to pay for city services (see "Where's the Money (Part One)? The Rich Got a Whole Lot Richer," page 17).

• A package of progressive tax and fee increases and cuts in corporate welfare that would hit only the richest individuals and biggest businesses in town could bring in $125 million a year – more than the projected $90 million shortfall. Not all of that revenue would be available for this year's budget, since some tax increases would require voter approval in November, but a comprehensive overhaul of local taxes would stabilize the city's budget in the future.

• More than 1,900 city employees earn at least $100,000 a year – and while lower-paid workers are facing layoffs and givebacks, almost every member of the six-figure club is getting a significant raise, and many get big bonuses for nothing more than doing their jobs. Just freezing pay for the top earners for one year would save $8 million – more than enough to prevent layoffs of lower-paid workers (see "Brown's Big Payroll," page 26).

• City departments are spending a phenomenal $90 million on no-bid contracts. Critics, including the San Francisco Civil Grand Jury, say those contracts cost the city millions that could be saved through competitive bidding.

• The city spends some $4.7 million a year just on public relations for city departments – at a time when community activists say it's harder than ever to get basic public information at city hall (see "Talk Isn't Cheap," page 18).

• There's plenty of other waste in the budget in areas Brown won't touch. The San Francisco Police Department alone is budgeted for $31.2 million just on overtime – far more than the cops spend in comparable cities (see "O.T. Bonanza at SFPD," page 24).

That's not by any means a complete picture of the corporate welfare, missing revenue, and bloated bureaucracy that has grown in this town during the six years of Brown's tenure. But even our limited analysis suggests that the supervisors should refuse to accept the mayor's budget without major, comprehensive changes.

Where the money is

For six years Brown had it easy. The boom times brought so much money into city hall that the mayor could be a good liberal – pouring money into improving city services like Muni, hiring enough new workers to keep the unions ecstatic – and never worry about how to pay the tab.

But that's over now, and for the first time in his executive career, Brown has to show where he puts his budgetary priorities. His first difficult budget comes almost exactly 20 years after the first of the Reagan-era tax cuts and economic policy changes took effect – changes that profoundly altered life in the United States. The Reagan tax cuts marked the absolute, final end of the long era started by Franklin D. Roosevelt, during which the middle class grew and the nation became, overall, more economically egalitarian.

Since 1981 the income and wealth inequality in this country has exploded. According to Kevin Phillips's new book, Wealth and Democracy, the income of the most highly paid corporate executives rose by a mind-boggling 4,300 percent between 1981 and 2000, while the income of most other workers merely doubled. And taxes on the rich dropped. By 1999 the United States had become the single most socially stratified nation in the developed world.

Meanwhile, the federal government has dramatically cut social programs – and aid to cities. That's left places like San Francisco in a constant scramble to find dollars to cover a larger and larger need.

In some cities, particularly in the Midwest, capital flight has so damaged local tax bases that it's hard for local government to take back in taxes any of the money the feds took away. But that's not true in San Francisco: the city is full of wealthy people and businesses who have benefited handsomely from the growing wealth inequality. (There are, for example, at least 10 billionaires living in town.) And the city's tax structure remains as regressive as the federal government's.

That's the only fair context in which to view this year's budget problems.

Fair taxes

Brown's budget virtually ignores the subject of tax increases. But the supervisors don't have to do that – and they shouldn't. Raising taxes on the rich during tough times is a time-honored (and eminently successful) tradition in much of the capitalist world, including, in the pre-Reagan years, the United States.

Under FDR high taxes on the wealthy were part of the New Deal – and, according to economist and New York Times columnist Paul Krugman, helped create the "Great Compression," the equalization of income in the post-depression era that lasted into the 1970s. World War II was funded in part with high taxes on the rich, including an excess-profits tax on corporations. In the 1960s, under both Lyndon Johnson and Richard Nixon, the rich paid a tax rate that went as high as 80 percent (and one year Nixon raised the top rate to 90 percent to help pay for the Vietnam War).

So how can San Francisco get money from the rich? Here are a few ideas.

After property taxes (which, thanks to Proposition 13, the 1978 state tax-cutting measure, are relatively inflexible), the single largest source of city revenue is the business tax. Until last year the city levied a tax on either the payroll or the gross receipts of a company, under a formula designed to make sure every business in town paid a fair share. The vast majority of companies paid the payroll tax, but a few – those that tend to earn large amounts of cash with relatively few employees – argued that the fact that they had to pay a gross-receipts tax was unfair, and 52 of them sued. The city settled the case by paying some $60 million to the businesses and repealing the gross-receipts tax.

Sup. Aaron Peskin is working on a measure for the November ballot that, if passed, would revamp the business-tax structure. His plan would impose gross-receipts taxes on five industries (contractors, real estate, gas stations, taxis, and rental cars), expand the payroll tax to cover law firms, doctors' offices, and accounting firms, and abolish the so-called new-jobs tax credit, which cost the city $21.5 million in 2001.

There's a simple way to make that tax plan even more progressive – and to use it as a way to bring in additional revenue from big businesses. The big-business lawsuit argued that the two-tiered tax structure was unfair because it allowed some businesses to pay one type of tax, but forced others to pay a different tax. Marc Norton of San Franciscans for Tax Justice argues that there's no legal reason the city can't simply impose both taxes – on everyone.

If that sounds like a way to double the city's business taxes, it is – but only the taxes on the biggest businesses. Because of the way SFTJ is presenting the case, the taxes – which in the past have been set at a flat rate paid by all – could easily be adjusted to tax smaller companies at a lower rate.

For example, most businesses now pay a 1.5 percent payroll tax, which brought in $216 million in fiscal year 2000-01. The city could set a sliding scale, charging the biggest businesses 2 percent or more and the smallest 0.5 percent, without changing the total revenue the tax brought in. That would reduce the overall tax burden on small businesses.

Then, by adding a gross-receipts tax – also on a sliding scale, perhaps exempting the first $500,000 or $1 million in revenue, to protect the smallest businesses – the city could not only recover the $37 million a year it lost by repealing the tax but also easily bring in another $30 million, most of it from the biggest companies.

Real estate and utilities

Last year – in the midst of a recession, when the commercial real estate market was in the toilet – San Francisco took in $38.9 million in real estate transfer taxes on properties that sold for more than $1 million, according to records compiled for the Bay Guardian by the San Francisco Assessor's Office. If that tax – currently .075 percent – were raised to 1.5 percent (the same level Oakland charges), the city would bring in an additional $19 million. If the real estate market picks up, that figure will be even higher; SFTJ estimates the tax hike could ultimately bring the city as much as $40 million a year.

That tax increase would fall overwhelmingly on the wealthiest people and businesses in the city. There are even ways to make it more progressive: the city could raise the rate to, say, 2 percent on properties sold for more than $5 million and 2.5 percent on properties sold for more than $10 million – virtually all of which would fall on businesses making commercial real estate transactions. (The few residential properties that sell for more than $5 million are bought and sold by people who can easily afford a slightly higher tax rate.)

Under Proposition 218, the 1996 state measure that limits local government's ability to raise taxes, an increase in the transfer tax might require a public vote. But since the supervisors are looking at putting a new business-tax plan on the ballot anyway, a comprehensive tax package (or a series of individual tax measures) could go on the ballot too.

Utilities are another big potential source of revenue. San Francisco charges special "franchise fees" to companies that have exclusive rights to use city property for private business, the biggest being Pacific Gas and Electric Co. and AT&T, the latter of which has the franchise for city cable service. PG&E pays a shockingly low fee – just one-half of 1 percent of revenue. That fee was set back in 1939, in a contract that almost certainly wouldn't hold up in court today. The city collected about $4.2 million in franchise fees from PG&E in the 1999-2000 fiscal year; if that fee had been increased to 5 percent (the same amount AT&T pays) the city would have brought in $31.8 million – an additional $27.6 million.

Of course, if San Francisco had a public power agency, it would almost certainly bring in hundreds of millions of dollars in new revenue. That won't help the budget this year – but municipalizing PG&E should be looked at as a major source of future revenue.

Then there's a city income tax. Nobody even likes to talk about it these days, but back in 1995, Sup. Tom Ammiano proposed a 2 percent tax on the income of people working in San Francisco who earned more than $150,000 a year. Technically, the city can't impose an income tax – that's preempted by state law. But there's a legal loophole, discovered by Oakland in the 1970s: An income tax is based on where someone lives. It's perfectly legal, the state Supreme Court ruled in 1978, for a city to tax people who work in the city. The advantage of that plan (called an "occupational license fee") is that it hits commuters, who use city services but don't pay other local taxes. Estimates at the time put the revenue from the 1995 proposal at $21 million a year; with the growth in high-end salaries since then, it would almost certainly bring in more. (Adjusted for inflation alone, the number would grow to $26 million.)

A key advantage of this tax: it can be deducted from state and federal income taxes. So, in effect, the state and the federal government – both of which have been cutting aid to cities – would pick up almost half the tab.

Fighting back

There are quite a few other suggestions for raising money out there. Service Employees International Union, Local 250, points out that there's almost $3 billion in tax-exempt property in San Francisco, much of it owned by big, relatively well-off nonprofits. The union suggests that the city demand "payments in lieu of taxes" from those institutions (which, of course, use city services). It's not a new idea: both Harvard University and the Massachusetts Institute of Technology pay in-lieu fees to the city of Cambridge, Mass., and the University of California pays some modest fees to Berkeley. San Francisco has some leverage, too: many of the big institutions get some city contracts. SFTJ has a long list of ideas at www.sftax.org, including some of those listed above. Every year the People's Budget Collaborative suggests ways to better fund city services.

For the past six years most of those ideas have gone nowhere: the budget has been relatively flush, and there's been little pressure to push for new revenue sources. But this year almost everyone who's feeling the sting of the proposed budget cuts is complaining, and some are organizing to fight back.