San Francisco Offers Free College by Hiking Real Estate Taxes: Courageous or Tone-Deaf?

by | BiggerPockets.com

Starting this fall, tuition at San Francisco community colleges will be free.

How will San Francisco pay the bill? By raising taxes on the wealthy. Specifically, by raising the real estate transfer tax on properties selling for more than $5 million.

Warning klaxon: political debate inbound! But instead of battening down the hatches, take a moment to set aside existing political beliefs and keep a more open mind. This story sounds simple on the surface, a classic question of “should we tax the rich more to pay for more resources for the poor,” but like most stories worth telling, there’s more than meets the eye.

How Will San Francisco’s Model Work, Exactly?

Last fall, San Francisco voters approved a ballot measure to raise real estate transfer taxes on properties selling for over $5 million. The transfer tax rate rose from 2% to 2.25% for properties selling for $5-10 million, rose from 2.5% to 2.75% for properties between $10-25 million, and rose from 2.5% to 3% for properties over $25 million.

The City expects the tax hike to rake in an extra $45 million every year.

That money goes into the City’s general fund, to be spent however the City desires. But one of the promises that the City made, in order to sell the tax hike to voters, was that it would offer free tuition for the City College of San Francisco. Of the $45 million/year they plan to collect from the tax hike, they’ve pledged $5.4 million/year to the City College.

Making the initiative even more progressive, the City College will actually pay lower-income students to attend. Well, sort of. They’re offering $500/year to help cover auxiliary expenses like text books and commutes.

There’s one more kicker: The only requirement to receive free tuition is having been a resident of San Francisco for at least a year. That means that even undocumented/illegal/whatever immigrants are entitled to free college tuition.

college-rental

A Budding Trend?

San Francisco is far from alone in exploring free college tuition. Remember all those strident statements by Bernie Sanders on the campaign trail about “making college free”? He may not have won the nomination, but he certainly won plenty of attention and adoration among younger, left-leaning voters.

Related: How to Pay for College Using Real Estate: A Definitive Guide

New York governor Andrew Cuomo announced last month that he intends a similar initiative in New York. According to his proposed plan, tuition would be free at city and state colleges across New York for any students whose families earn less than $125,000/year.

Tennessee also started offering free community college tuition in 2015 and is planning to expand the program this year. Meanwhile, Rhode Island’s governor is pushing her own initiative.

“Free college” is a rallying cry with legs—and little wonder, with college tuitions and fees having risen 63% in the ten years from 2006-2016. Nor does it end with tuition; college textbook costs rose 88% in that time. University housing costs rose 51%.

Skyrocketing education costs are frankly alarming. No matter your political stripe, everyone can probably agree that education costs have spun out of control.

We can all understand the urge to halt this explosion in costs. But are people like Bernie Sanders, Gov. Cuomo and the voters in San Francisco attacking the symptoms or the disease?

Roots of the Problem

If we as a nation are serious about containing this tuition outbreak, we need to look beyond the emotional rallying cries of “college should just be free!”

Why have college costs risen so much? What are the roots of the problem?

I’m a real estate and personal finance expert, not a higher education expert. But even laypeople like you and me can look at some basic numbers and use a little deductive logic.

Maybe the cost of labor has gone up for college professors? Nope. Professors’ salaries have barely kept pace with inflation for the last ten years.

Some pundits assert that states have pulled back on funding for state universities. But state funding today is much higher per student than it was in the 1960s and 1970s in inflation-adjusted dollars. And if state funding were the root of the problem, why have private colleges’ tuition quadrupled in the last 30 years?

Are janitors and landscapers suddenly earning $100,000? What’s going on?

There’s a strong case to be made that tuition costs have skyrocketed because of administrative bloat. Colleges administrative positions inflated by 60% between 1993-2009—ten times faster than the increase in tenured professors.

Ultimately, students are paying more for colleges today because they’re willing to pay more. In fact, some analysts argue that if the federal government stopped subsidizing student loan rates, students would balk at education costs and colleges would be forced to charge less. That would certainly benefit students more than lower-interest loans to pay higher bills.

Does Free Translate to Better Results?

Here’s a question that San Francisco may not have bothered asking: Was tuition the primary factor preventing students from enrolling?

After all that discussion above about skyrocketing tuition costs, that might sound like a no-brainer. However, San Francisco’s City College was already heavily subsidized and dirt cheap, at $47/credit.

And do people even value what they don’t have to pay for? Heck, look at high school attendance rates. Is it possible City College was underutilized not because of the $400-600/semester tuition, but because lower-income residents struggled to get through high school, much less attempt college?

Consider the following statement from educational nonprofit Attendance Works about primary and secondary schools: “Low-income students are four times more likely to be chronically absent than others often for reasons beyond their control, such as unstable housing, unreliable transportation and a lack of access to health care.”

Perhaps offering to cut $47/credit off tuition isn’t the best way to create new economic prospects for low-income families? There’s a case to be made that the $47/credit wasn’t the real reason why not everyone in San Francisco was leaping to enroll in college.

Will San Francisco’s Plan Work?

Even if you wave away the question of whether tuition was the real inhibitor at City College, there’s another big problem for anyone serious about improving the prospects of low-income families. How will success be measured? If we want to know if San Francisco’s plan will “work,” don’t we need to know what “work” means?

According to the U.S. Department of Education, only 15% of full-time students who start community college actually graduate with a bachelor’s degree within six years of starting. Before you ask, that number is only slightly better for two-year degrees: Twenty percent of full-time community college students achieve an associate’s degree within three years of starting.

Even if San Francisco bothered to give a nod to accountability and promised improved graduation rates, that still misses the point. The point is reducing the skills/needs gap between employees and employers. We have plenty of men in this country who’d love to work in a manufacturing plant, but few manufacturing jobs. We also have plenty of companies who need web development work, but not enough trained, experienced web developers.

If San Francisco is serious about improving career prospects for its lower-income residents, how about holding itself accountable for this funding? Think about how powerful it would be if San Francisco went on record and committed: “By 2025, our City College will have raised the employability of 150,000 residents by placing them in middle-income jobs upon graduation.”

Any Impact on San Francisco Real Estate?

San Francisco offers an extreme case study: plentiful high-skill, high-pay jobs without enough lower-skill, lower-pay jobs. It’s been a story of rapid gentrification (for better or worse, depending on who you ask) and a story of rapid housing appreciation.

Even so, the real estate market in San Francisco seems to have overheated. In 2016, rents dropped nearly 5%, contrasted with 4.5% growth in 2015 and a precipitous 13.5% leap in 2014.

Related: Why a College Degree is Overrated & Unnecessary for Many Americans

Nor is it only rents. Sales in San Francisco fell 13% in the first nine months of 2016.

None of this has anything to do with the tax rate hike on higher-end homes. But it calls into question the prevailing attitude around San Francisco’s city hall. “We want to spend even more money? No problem, we can just keep opening the cash register of high-end real estate.”

San Francisco is an attractive place to live, given its thriving tech industry, mild weather, and convenient location near beaches, mountains, agriculture and abundant waterfront—yet even tech workers and companies have started leaving the Bay Area for cheaper cities to call home. For all that San Francisco’s city council has trumpeted its concerns over gentrification, they certainly haven’t minded the increased tax revenue. If anything, it’s boosted their appetite for more money to spend.

But sooner or later, housing markets in San Francisco will correct, the job market will equalize, and eventually the City of San Francisco will open its cash register drawer of tax hikes one too many times. When that day comes, I hope that San Francisco really has improved job prospects for its lower-income residents. But with no clear metrics for success, I doubt we’ll ever know.

Whew! Holy politics, Batman! Who’s ready with a barbed quip to put this writer in his place?

I’m sure the opinions will blaze in faster and furious-er than Vin Diesel. I’ll try not to take it personally—I truly am curious about everyone’s thoughts on this initiative!

About Author

Brian Davis

Brian is a rental investor and landlord with 15 income properties, who provides free training videos about passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world frequently (if not always in style).

49 Comments

  1. Scott Trench

    Like other taxes, this real estate tax will simply indirectly shift the burden to everyone in the city. If taxes increase, even transfer taxes, then the price that investors must pay to purchase property increases, and the amount of rent they need to charge increases. The more you control it, the more prices spiral out of control. As always, the poor and middle class will face this burden in the form of rising rents and prices, not the guy purchasing the new real estate.

    It sounds great – tax the wealthy! The wealthy should love it. It means that the price barriers to entry in the SF commercial market swell to still greater heights, and the costs, as always, can be passed on to the tenants.

    • Brian Davis

      Exactly. Businesses and wealthy individuals don’t just roll over. At the end of the day, the City of San Francisco wanted to spend more money. So they put on their thinking caps and came up with a brilliant way to sell a tax hike to the public. Even with their free tuition promise, the city council has carte blanche to spend most of the money from the tax hike on whatever pet projects they want.

      • Mark F.

        I think this is exactly what happened. The free college initiative was simply the bait to get people to buy into another tax increase. As you’ve shown, only a small portion of the revenues generated will actually fund college expenses.

  2. Just one more nail in the coffin.

    More people with money will leave and more businesses will leave (combination of this initiative and simply as a result of a general war on the wealthy… a breaking point will be reached). These taxes will be expanded to lower priced home sales, and even more will leave. Meanwhile, more people will try to freeload off the system and stretch resources. Death spiral.

    Is there any doubt that a federal bail-out will be required at some point?

    • Donal Murphy

      Except it is the opposite. Businesses like infrastructure and the educated job force states like New York and California provide. Taxes are a cost of doing business.

      Look at the states that go crazy with cutting corporate and income taxes. Kansas is a disaster. Texas spent years cutting taxes and infrastructure thinking they can float by on that oil money, but now that the market has drastically dropped the price, they are suffering. The MidWestern city my wife grew up in raised corporate taxes and put all the extra revenue into infrastructure and quality of life projects and they actually have more businesses generating more revenue.

      I agree raising real estate taxes is the wrong way to go about it for SF, but the fact is the places with higher tax rates tend to have better job markets and standard of living.

      • Interesting, but not sure your contention is supported by the facts. There have been numerous articles over the last 5 years citing the loss of businesses from CA to lower tax states like NV. I’m not sure about business fleeing NY, but many people have.

        As far as a better standard of living… sorry, not buying that either. I have known more than one young couple in CA that had to drive two hours or more each way to work just to afford a home. So if you’re rich, sure, CA may offer a good standard of living. Not true if you are just starting a career.

        You cite “one mid-western city” and say they put it all into infrastructure. OK… fact is, higher taxes rarely are spent in this way. They go in a general fund and what happens to that money from there?

    • Brian Davis

      I hear ya. It’s an opinion piece though, not a news piece (not that news pieces run down the middle either). I actually think free college tuition makes for a good economic experiment, and am not opposed on principle to testing it. My biggest beef with SF is the lack of accountability for the initiative – I’m all for experiments, but experiments need to have a hypothesis and measurable results.

    • Allison Leung

      Hi James:

      Thanks for weighing in. This story has already been covered by many sources, so I asked Brian to include his opinions on some of the possible repercussions of this measure. I’d invite anyone reading to agree OR disagree with this assessment in the comments section. We’d love to get some discussion going and explore both sides of this piece of legislation.

    • Our business is so dramatically impacted by politics it would be irresponsible to shy away from these issues. If someones feelings get hurt on either side, their skin just might not be thick enough to be in the landlord business… just a thought.

    • Sergey Tkachev

      I actually think we need more of these kinds of conversations, not less. Many issues in our country stem from political correctness and people being pressured to feel that they should not express an opinion that may hurt someone’s feelings. Instead of attacking the piece by labeling it “partisan”, why not present a counter-argument?
      @Brian Davis – thank you for being bold and not afraid to express your viewpoints, and BP, for supporting free sharing of opinions. My respect for Biggerpockets has grown even more seeing this piece!

  3. gino barbaro

    I am always fearful of an additional tax that is not earmarked for some specific purpose. This tax is another transfer of funds from one class to another. What most people don’t realize that do not live in these high areas of taxes is that these tax hikes keep chipping away at the quality of life and the affordability, along with decreasing the value of real estate. People in these areas just have less disposable income.
    I wish San Francisco good luck. I’m sure NY will follow suit.

  4. It’s going to drive up the cost or living even more in an already very expensive place to live. I have another issue with the concept.
    If you were to receive a free bag of $20,000 what would most people do with it? Waste it.
    If you were to receive free college what would most people do with it? Waste it.
    If you do not work for your desires you will not appreciate it when you have it.

  5. Jerry W.

    Keep in mind that this area already has high property taxes, and California has one of the highest state income taxes in the U.S. Add in the massively complex legal system, high regulation of everything from farming to emissions on cars, the most stringent standards on possible cancer causing substances, and you have a massive government infrastructure that keeps getting more and more top heavy. Sooner or later, like Orange County it will tip over under it’s own weight. It’s funny, people find the most beautiful places on earth then manage to build them up into a place that is mostly steel and concrete. then create the largest gap possible between the haves and the have nots. Humans certainly have a lot to learn if we plan to be around for more than a few more centuries.

  6. Michael Williams

    Disclaimer: This is my opinion so don’t be too cruel with your attacks. Here are facts that have been proven. 1. Anytime their is a tax increase with no detailed inventory of use there will be abuse, especially when politicians or government officials are involved. As mark said this is just another creative way to get the citizens to buy into a tax increase in an already high tax area. He also pointed out how small the percentage of the tax is actually going towards the issue it is designed to address. That was an immediate red flag for me when I read it. The problem with lower income citizens starts with third grade education, that’s where the statistics say the the biggest impact is made. 3. Yes many will waste it because it’s free, but many more want to change their situation and see college as an answer to that freedom. 4. But the flip side is how often do these graduate end up in the field they have the degree in. The link to “Why a College Degree is Overrated & Unnecessary for Many Americans” will back this up I’m sure.

    But to be fair to the idea of this concept if they follow the model that Harris Rosen of Orlando Florida this could work for the citizens of San Francisco. He turned an entire community into a success story with just $11 million dollars. Every major city should look at his model for achieving what he achieved in Tangelo Park. He started with free daycare and preK programs that later yielded a community where the crime rate plummeted, residents took pride in their neighborhoods and the high school graduation rate exploded. This should be a long term solution if tax dollars are going to be used. People need a hope of a better future more than free college. If you start at the root (preK) the college tuition will be paid with scholarships. Free college works in other countries because their mindset is different, America, as a whole, is not there mentally yet. We still have a lot of social issues to iron out first.

    • Mike Zitomer

      I agree entirely with Michael’s point that an investment in free daycare would go way further then free tuition. Many times daycare is just as expensive if not more expensive then college. There are many people who want and can work, but can’t because the cost of daycare is way more expensive then their earnings. As other people have said if you get a free college education you are likely to waste it or not finish. If you give free daycare, those are struggling families that will provide a more stable home life and lead to lower crime rates, better education, and more working people and thus more tax dollars into the system.

  7. Leslie Newman

    Very good article! The primary reason for the increase in education costs I believe, is the fincialization of student loans. These student loan programs got legs after the sub-prime crisis took away the investment yield opportunities there. The other debt arena that exploded after the sub-prime debacle is auto loans. They are now facing their own sub-prime crisis that is already having repercussions.

    • Sergey Tkachev

      Nick, Brian’s post is directly related to real estate, which is what BP is all about. And whether we like it or not, politics meddles itself into real estate. Hence, issues like this MUST be discussed, especially on BP. No one is forcing you to read these kind of opinions but as you can see, there are quite a few BP’ers that are finding this discussion valuable.

      Please don’t take any offense, I’m expressing a strong opinion about free speech because my family immigrated from a country where there was no free speech and everyone had to be politically correct – believe me, that is NOT what is best for the US. We must be able to talk about opposing political views without being shut down.

      If you have a different opinion from Brian’s point of view, please share it, but don’t try to silence beneficial discussions just because you don’t agree.

  8. steve harlow

    Brian your post is thought provoking. I’ve lived in CA my entire 60 plus years and invested here for 30+.
    In the interest of time (my time) I will keep this short. One of the reasons that college costs continue to go up in CA is because of the generous retirement system they (educators) have. Without going into the very complex CALPERS system (that supports educators and many other public employees) let me just say that it currently has a unfunded liability of about 160 billion dollars. The raising of college costs indirectly is intended ti help close that gap.
    Secondly there are several reasons for the increase in staff-student rations. Be careful with using the numbers for a apple vs apple comparison. Some systems like the Calif UC system are top heavy because there is a high emphasis on research vs the California State University System.
    Tuition costs for the community colleges in CA have always been very low. Creating the tax probably wont have much of an effect as investors up there whom had already decided to sell or stay before this.
    Income vs Price rations are off the planet up there with alot of families doubling up on a house .. to rent.

    • Rich Lopes

      Well said Steve! Bloated Administrations, Student Loan subsidies, Retirement funding, inflation etc are going to be around forever. How is the state of CA or for that matter any state going to addressing this? Increasing the taxes can only go so far. The root cause of the problem needs to be fixed without which any solution will ultimately fail. Is it hard to find and fix the root cause – probably but it not entirely impossible if there is enough support.

  9. kiran gopana

    I thought CA has a higher tax rate ( just over 1%); when I moved to Michigan and it goes by “mil rate” here whatever and on property valued at $100,000 I have to pay $7000. I currently own two properties in California and roughly pay property taxes $4000 on each. People complain about high taxes in California a lot but for middle class; income <$125,000, it is a lot less.

  10. Brad Lohnes

    Good analysis and comments. Despite my “fiscally conservative” politics, I actually tend to support free or almost-free education. The reason that I support it is to give kids from lower socioeconomic environments a key ingredient: hope. This has to begin at a very young age, when encouraged by elementary school teachers that anyone – yes anyone – can get advanced education and create a career and a life for themselves that is different from how they grew up. Without this hope, kids stop caring about school from a young age. But to your point about measuring success – this also means that it would take decades to measure the results.

    Also, I’m not an expert on this stuff. Just what I’ve observed and my own experience. My parents dangled university education out there as the goal. And I believed that it was actually available to me as long as I did my part (got the grades).

    • Easy to argue the exact opposite of your point too… that an “entitlement” mentality applied to higher education devalues it for everyone. I’ll stick with the rather old fashioned and increasingly unpopular notion that working hard for something actually has numerous benefits.

      Fact is, there are low cost community colleges all over the U.S. that offer opportunity. Working your way through your first two years of school without accumulating much, if any, debt is indeed possible.

  11. Susan Maneck

    What is being lost in this conversation is the fact that a generation ago all community colleges are free. Even the California State Universities (but not the UC system) was free until Reagan became governor. Administrative costs are ridiculous but it is the decrease in state support which largely accounts in the higher tuition. To complain that only a minority of needy students finish their degrees within six years is to miss a key element. Poor students have to work and often can’t attend full time so it will naturally take longer to finish. Those who try to take a full load while working full time are setting themselves up for failure. The timeline for finishing should be raised from 6 years to 10 for many of these students. And when it comes to community colleges keep in mind that a degree is often not even the goal. Some of these students are not looking for AA or BA degrees. Often what they want is certificates in plumbing. electricity, etc.
    The truth is that us baby-boomers got many more advantages when it came to education than young people do today.
    I speak as a California native now teaching at a historically black state university in Mississippi.

  12. Talisman Times on

    Tone-Deaf; More like utterly Deaf, Dumb and Blind. I own rentals in the Far East SF Bay where there is at least some semblance of sanity and rational thought. Costs and Regulations are high here in the outer regions of the Bay Area, but rental rates are good and appreciation has been great so all in all I can’t really complain.

    But for SF proper, it has been totally hijacked by a politically “elite” class that sees itself as so far above and beyond anyone or anything else in terms of secular piety and intellectual vision that I’m not sure what can be done at this point. Its a virulently malignant self righteousness that listens to no one and has absolutely zero tolerance for meritorious dissenting voices. They are fully untethered, and a law unto themselves.

  13. Michael Lee

    Great article! Anytime taxes are raised and taken from the “rich” is usually a bad idea hidden in a place that they can sell. When I went to college back in 1974 it was cheap with no semester intuition. We now have a daughter in her 3rd year at the Arkansas University and we have to pay 6,00 or 8,000 a semester just for intuition and will live just outside of Dallas Texas. We get a so called “intuition fee that is lower because our states touch. I do not giving anyone a break on what they chose to do. I am now unemployed because of my natural happenings and I have been turned down by the Social Security Adminstration just because I owned my own company and chose not to pay myself. I was also turned down by the Texas Real Estate Corporation with my real estate Broker license for about 30 years and told me I had to start all over Eventhough that costed me about $30,000 to them over 30 years. There is nothing to do for people that are white and male.

  14. Greg Pfister

    Good article and good comments. When government continues to try to ‘control’ economies and markets, it creates forces or bubbles within that system. Make student loans cheap and easy to get and college costs continue to rise. And why not? The money is easy to get. Raise tax on high-end real-estate (which may mean apartment complexes) and results will impact the renter in one way or another. I agree that providing free daycare would be a much better boost to the economy and families than reducing an already inexpensive community college tuition.

  15. Sergey Tkachev

    Great article, at gives something to think about given so many complexities of the situation. I think one of the biggest issues is that instead of trying to figure out the reasons for soaring education costs and trying to fix the problem (as usual, it’s an expense problem) the officials decided to just throw more money at the problem. That seems to always be the answer, the sad truth is that in most situations it doesn’t work. I would consider to agree with some of the posters who support free education if officials had at least attempted to attack the issue of rising costs (by addressing the administrative bureaucracies that exist at so many schools), but that is not politically saavy. The problem is that government seems to always think that more money will fix all problems and that is far from the truth.

  16. Michael Woodward

    I have to wonder when the tipping point will be with SF and CA as a whole. They’re on the leading edge of the idea that you can get all the “free” stuff you want by taxing the population. It’s like trying to build the upper floors of a multi-story building by using some of the boards from the lower floors. At some point, the structure can’t hold itself up because you’re continually weakening the base.

    The day someone proves that perpetual motion provides sustainable “free” energy is the day I’ll believe that taxing provides “free” stuff.

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