By Patrick Spauster and Sarah Strochak
Read on Urban Wire
California has one of the nation’s worst housing shortages. It ranks as the 49th among all states in number of housing units per resident. California homeowners face monthly mortgage costs 47 percent higher than homeowners in the rest of the country, California renters pay 40 percent more than the national median, and 80 percent of low-income households in California spend 30 percent or more of their income on housing.
Voters will consider California’s Proposition 15 on their ballots this November. Proposition 15 would change the way local governments assess the value of commercial and industrial properties compared with residential properties. It would raise property taxes on commercial and industrial properties to market value, and keep property taxes on residential properties at the historical cost, with small annual increases. Because Proposition 15 splits property tax assessment schedules by property type, it is often referred to as the “split-roll” ballot initiative. In our new report, we examined whether Proposition 15 will change incentives for zoning and housing development.
Opponents of the proposition say split-roll tax reforms will encourage cities to rezone residential land for commercial or industrial use to capture higher property taxes they collect for these types of properties. On the other hand, proponents say cities can use increased tax revenue to develop more housing and housing infrastructure. They also say the reforms might encourage owners to convert vacant or underutilized commercial or industrial properties to residential uses.
On balance, we find that split-roll tax reforms are more likely to increase the housing supply in California than to constrain it. But we also find that split roll is not likely to solve California’s housing shortage or affordability challenges without additional policies and reforms.
Proposition 15 won’t affect many properties’ land use
We looked at property records data in four California cities—Los Angeles, Berkeley, Fresno, and Chula Vista—to identify two types of properties for which Proposition 15 is likely to change public and private incentives and affect housing supply.
- At-risk properties. Properties “at risk” of being rezoned from residential use to commercial or industrial use because these uses may generate more tax revenue for municipalities.
- Opportunity properties. Properties where there is “opportunity” for private owners or developers to convert from commercial or industrial use to residential use to save on their property tax bill.
In all four cities, we found few properties at risk for rezoning from residential use to commercial or industrial use. To qualify as “at risk,” properties must be vacant or have an older residential structure, be near a commercial or industrial area, and be zoned for residential use. Many more “opportunity” properties are eligible to be converted to housing than properties at risk of being rezoned for commercial or industrial use. For our analysis, we assumed opportunity properties must be vacant or have an aging commercial or industrial structure and be located in a zone that already allows residential use.
Number of At-Risk and Opportunity Parcels as a Share of Total Parcels in Case Study Cities
|“At-risk” properties||“Opportunity” properties|
|Properties||Share of total city properties||Properties||Share of total city properties|
Source: Authors’ calculations from First American property records data.
Though opportunity properties far outnumber at-risk properties, opportunity properties still compose a modest portion of total properties citywide. In Berkeley, just 0.08 percent of properties were at risk for rezoning, while 0.31 percent of properties presented opportunities for residential development.
Proposition 15 won’t drastically change zoning incentives for cities
Even if cities decided to rezone all eligible properties, the revenue generated would be modest at best. The additional tax revenue from converting at-risk properties is limited by California’s property tax apportionment, by which only a share of each additional dollar in property tax levied is allocated to the jurisdiction. As a result, returns on rezoning are significantly constrained. For example, under moderate assumptions about price appreciation (3.5 percent annually), Berkeley would gain only $270,000 in the 20th year after Proposition 15 goes into effect. For context, Berkeley brought in nearly $74 million in property tax revenue in 2018, so this increase, when discounted at 2 percent for 20 years, is less than half of 1 percent of a typical year’s property tax revenue.
Proposition 15 may incentivize private owners and developers to build more housing
By contrast, private owners keep 100 percent of any savings generated by converting opportunity properties. Thus, owners of opportunity parcels could see significant long-term financial benefits from converting to residential use. In Berkeley, where we found 88 opportunity parcels, the tax savings for owners that convert to residential use could be as high as $754,000 in the 10th year after conversion and $2 million in the 20th year. Under high economic growth scenarios, the total savings could be as large as $6 million in the 20th year. These financial incentives under Proposition 15 may encourage private owners and developers to convert vacant or underutilized properties to residential use, providing much-needed housing.
Proposition 15 is more likely to increase housing supply
In all our case study cities, opportunity properties not only far outnumber at-risk properties, but the total private incentives to develop opportunity properties also overwhelmed the public incentives to rezone at-risk properties. Berkeley, Fresno, and Los Angeles had a total of $400 million in long-term opportunity tax savings in the 20th year after conversion, compared with just $62 million in potential at-risk tax revenue in the 20th year. Because incentives for municipalities to rezone out of residential use are weak and private incentives to redevelop to residential use are strong, we conclude that split roll is more likely to create housing than to limit it.
Proposition 15 can’t fix California’s housing woes on its own
Proposition 15 might moderately increase housing supply, but because it affects so few properties, it can’t solve California’s housing crisis. If Californians want to address affordable housing needs, they can consider additional land-use reforms, like allowing multifamily housing development on any land zoned for commercial use, which could unlock some empty or underutilized offices and strip malls to create more housing. To help alleviate California’s housing shortage, policymakers could consider coupling Proposition 15 with other reforms to boost housing supply.