Report: Does state tax policy discourage housing production?

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(Photo: Art Gray/Wikimedia)

Tax policy is one of the driving factors limiting the production of housing that is affordable in California. That’s the conclusion of “Does State Tax Policy Discourage Housing Production?,” a report from SPUR and California Forward (CA FWD).

“It’s no secret that California’s lack of housing affordability is a major contributor to our state’s income inequality,” said CA FWD CEO Micah Weinberg. “It’s important to find out what is stalling housing production and how we can enact policies to increase production.” In order to meet demand and keep income inequality from becoming worse, a recent analysis by SPUR found the Bay Area needs to build an additional 2.2 million units between now and 2070.

The report focuses on tax policy and how local jurisdictions, who have the power to decide what and where to build, can prioritize developments based on the revenue they expect to receive. That revenue comes from a combination of taxes, including property, sales and business.

Since the passage of Proposition 13 in 1978, which caps property tax rates at 1% of the assessed value in the base year (usually when the property was purchased) and limits the increase to 2% per year, jurisdictions view housing as less beneficial and even detrimental to their fiscal health. Instead, they turn to developments that produce sales tax such as big box store developments or to developments that don’t require many publicly funded services, such as offices.

The report reviewed the reliance of property tax versus sales tax on the Bay Area’s 101 cities and whether increasing their share of property tax would incentivize them to produce more housing. But it’s complicated. Overall, property tax represents about 30% of municipal budgets, but the share a city receives vary widely. The city of Hercules receives 3.5% of the property taxes it generates, while the city of Berkeley receives 35%.

The analysis found cities that receive a larger share of the property tax they generate contributed a larger share of the housing supply in the Bay Area over a four-year period (2015-2018).

“State tax policy should support jurisdictions that are doing the right thing. Incentives should be aligned to encourage cities to zone for the housing that the region needs,” said SPUR Senior Advisor Sarah Karlinsky.

The report offers principles for policy options:

1. The tax system should be fair.

  • Cities should be treated in an equitable manner and not receive certain property tax allocation shares based on legacy percentages.
  • The system should support cities that promote public policy goals that are aligned with regional and state values including zoning for sufficient housing, creating resources for housing that is affordable and not promoting sprawl development.
  • The tax system should not unduly subsidize long standing homeowners at the expense of newcomers.

2. The tax system should provide adequate revenues.

  • Any future changes to the tax system should provide sufficient revenues for the activities of local government so that zoning for developments that produce sales tax revenue and housing construction taxes are not incentivized.

3. The tax system should incentivize, not discourage housing production.

4. The tax system should be simple and clear.

  • By making the property tax system more transparent and clearer, tradeoffs in the system could be more explicit.

Potential policy options include:

  1. Amend Prop 13 and replace it with a new property tax allocation model that is more sensitive to housing development.
  2. Promote regional tax sharing. A more beneficial system would be one in which sales tax is collected regionally and reapportioned based on a more equitable formula, such as by population.
  3. Add a small increase to the Prop 13 rate cap for infrastructure investment.

With an enormously complex tax system, California must consider the negative consequences it has on housing production and support measures that will encourage housing development. The tax system should also reward cities for creating and implementing policies what will result in a housing supply that will meet the needs of all Californians.

To read “Does State Tax Policy Discourage Housing Production?” please click here.


Nadine Ono

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