Later this year, San Francisco Supervisors will consider an ambitious plan to make reparations to black residents to compensate them for the lingering effects of slavery and more recent discriminatory public policies. While other Cato scholars have commented more generally on reparations at the national level and in San Francisco, I will focus here on the fiscal implications and the local economic impact.

A Hoover institution analysis of the plan estimates its cost at $200 billion, with most of the expense attributable to the recommended $5 million cash payment to each eligible individual. Because the recommendations have not been fully fleshed out, Hoover’s estimate is necessarily speculative, but appears to be the best available. San Francisco’s reparations committee has yet to provide a financial analysis, stating that “it is not its job to figure out how to finance San Francisco’s atonement and repair.”

Assuming the cost is around $200 billion, can the city and county government fund the reparations plan? It can only do so through some combination of large-scale borrowing and tax increases.

In the 2022–23, San Francisco’s general fund budget is $6.8 billion. The remainder of the government’s overall $14 billion fiscal footprint comes from self-supporting enterprises such as San Francisco International Airport (SFO) and the municipal water system. There may be some ability to raise the user fees funding these enterprises, but a large increase could hamper the competitiveness of those services (like SFO) that have alternatives (like nearby airports).

Much of San Francisco’s general fund revenue comes from non-tax revenues, principally state and federal aid. Tax revenues account for only $4.4 billion of general fund revenue. So, funding a $200 billion reparations program in one year would involve a more than forty-fold tax increase.

A more realistic approach would be to issue bonds to cover the cost of the reparations, spreading the cost over 30 years. But such borrowing faces two large barriers. First, city and county issued general obligation bonds must be approved by two-thirds of local voters. Second, California’s constitution limits the purpose of such bonds to the “acquisition and improvement of real property”. To add reparations as an allowable use of bond proceeds, voters across the state of California would have to approve a constitutional amendment, but only by a simple majority.

If reparations proponents could overcome these hurdles. San Francisco’s government could then fund the program, paying debt service by levying an additional property tax on the $285 billion of taxable property in San Francisco. Assuming the bonds mature over 30 years and carry a 4 percent interest rate, and assuming that assessed values increase 4 percent annually, the additional tax levy would have to be about 2.4 percent of assessed valuation.

That additional levy would roughly triple ad valorem property taxes throughout the city. A reasonable expectation is that this higher tax rate would put significant downward pressure on property values, potentially breaking the 4 percent average annual property appreciation rate assumption made above. If that happens, the tax rate would have to increase even further.

Indeed, the impact of such a large tax increase could be to push the city’s economy into a “doom loop” recently described in the San Francisco Chronicle as follows:

Interconnected forces trap the city in economic free fall: Workers remain primarily remote; office space sits empty; businesses shutter; mass transit is sharply reduced or even bankrupt, making it even harder for low- and middle-wage workers who enable restaurants and small businesses to operate, causing major budget shortfalls from declining tax revenue that imperil numerous city services, trigger mass layoffs of city workers and shred the social safety net, all of which causes more people to leave.

In the week after The Chronicle raised the possibility of a doom loop, the risk of this scenario seemed to increase with the murder of a high profile tech executive downtown, the bludgeoning of a former fire commissioner in the Marina district, and news that the city’s commercial real estate vacancy rate had reached a record 29.5 percent.

A large tax increase could be the last straw. While much is made of Californians moving to other states, there has also been a lot of movement within the state. Bay Area residents have been relocating to the Sacramento area to lower their cost of living while San Franciscans are moving to suburbs with more space and better schools.

So even those who like California’s liberal policies and are willing to pay higher income and sales taxes to live in the Golden State have options. And, since San Francisco has an area of only 47 square miles, residents and businesses would not have to move far to avoid its reparations policy and the extra property taxes that it would require.