Three Better Ideas Than a Vacant Storefront Tax for San Francisco

By guest author Cathy Reisenwitz
March 27, 2019

This month the San Francisco Board of Supervisors voted unanimously to force SF commercial building owners to register their vacant storefronts with the city’s Department of Building Inspection and pay a $711 annual registration fee.

This tax is unlikely to solve the problem it’s intended to solve. It also further complicates the tax code, which creates opportunities for manipulation by incumbents for rent-seeking. And it’s a boon to property inspection companies, who owners now have to pay yearly to inspect their properties for city code compliance. And it tasks the already backlogged Department of Building Inspection with determining whether the storefronts are vacant due to speculation or legitimate reasons like mandatory seismic retrofitting.

If we actually want to reduce commercial vacancies, we should look at more cooperative, effective solutions.

Legislation author Supervisor Sandra Lee Fewer wants to punish property owners who let their properties sit vacant while they wait for rents to go up and encourage them to rent them out instead.

“When you have commercial property owners holding multiple storefronts vacant for long periods of time, that hurts all the other small businesses in the area who rely on a vibrant commercial corridor to attract customers,” Fewer said.

But vacancy taxes haven’t worked in other cities. Paris failed to decrease their residential vacancy rate with taxation. Washington, D.C.’s vacancy tax took nearly $10 million from poorly connected landowners in 2016 but didn’t do much to reduce rents or lower the vacancy rate.

Burdening commercial building owners with more taxes and inspection requirements creates loophole opportunities for rent-seeking incumbents. As with most taxes, savvier owners don’t pay.

Many owners file for exemptions or ask for building permits for improvements they will never make. Chris Sandvig, director of policy at the Pittsburgh Community Reinvestment Group told Pew that many owners who are unsure their property values will increase would simply not pay their tax, burdening the city with enforcement.

Vacancy taxes don’t work not least because if making zero income from a valuable asset is the most profitable move for property owners then $711 isn’t going to change that calculus much.

Instead of increasing taxes and inspection requirement, governments should be eliminating the barriers they’ve erected to renting out properties.

That’s what Christian Britschgi suggests in Reason. In a growing city, property owners rent their buildings before developers build competing units. Only in a city where property owners can count on no new buildings does it make sense to leave them empty. “A more direct response to that would be to simply allow for more development, not to impose another blunt tax on property owners,” Britschgi writes.

Get government out of the way of building new commercial properties, and owners will rush to get their buildings rented out.

Another idea: reform the zoning code. The Golden Gate Restaurant Association backed the tax because they want to see more buildings available to restaurants. “Much of the economic development in the last 10 years has been related to restaurants and other related food businesses,” Gwyneth Borden, executive director of the Golden Gate Restaurant Association wrote. “By having accurate data and hopefully opening up more vacant storefronts, restaurants can continue to be anchors in our neighborhoods.”

But the tax can’t get restaurants into buildings that aren’t zoned for them. A 2018 survey of vacant commercial properties found that nearly 80 percent of SF’s vacant shops are zoned for non-restaurant use. Re-zoning vacant properties for a wider array of uses would make them more profitable to rent while diversifying the types of businesses available to neighborhood residents.

Speaking of neighbors, Corey Smith, deputy director of the Housing Action Coalition offered another, more voluntary solution to retail vacancies: more housing. If we “add housing at all levels of affordability along our commercial corridors,” Smith said, those businesses will have a bigger pool of customers to draw in.

Commercial vacancy is a problem for SF neighborhoods. But the solution isn’t more government. It’s less. Building more units, more housing, and re-zoning buildings for a wider variety of uses are more likely to be effective than this tax and come with far fewer unintended consequences and opportunity for rent-seeking.