Punishment is one thing, and it certainly is good for a feeling of justice. But the real problem San Francisco is experiencing is lack of deterrent. That's related, but not quite the same.
If there is a way to keep up the deterrent, but sacrifice some punishment to get more rehabilitation then that's worth discussing. That's what Scandinavia is trying to do (in addition to other policies that affect crime rate). A prison turns out to be a good deterrent even if you don't get raped there.
In comparison, just not prosecuting theft at all is removing not just the punishment, it's also removing the deterrent, and I don't see how it's going to rehabilitate anyone. Obviously punishing the theft as a misdemeanor was supposed to be the deterrent, but without enforcement all that's left is a total failure.