Who Killed Zoning Reform in California?

For a moment, it seemed like California policymakers were ready to pass legislation capable of putting a serious dent in the state’s housing-affordability crisis. But in May, the state senate shelved Senate Bill 50, which would have eased restrictions on housing density along public-transit corridors and in job-rich areas. SB 50’s sponsors had built a broad bipartisan coalition of support, and polling indicated that a majority of Californians supported key provisions. State Senator Anthony Portantino, chairman of the appropriations committee, took the steps that blocked the bill, but, according to Liam Dillon of the Los Angeles Times, suburban homeowners were the real force behind SB 50’s demise. Portantino, after all, represents wealthy Los Angeles suburbs like La Cañada Flintridge, which haven’t built a single apartment in decades.

For all the disturbing media coverage of homelessness and displacement in the Bay Area and Los Angeles, the housing crisis has mostly been a boon for California homeowners. The planning-induced scarcity—coupled with soaring tech-sector salaries and a steady flow of billion-dollar IPOs—has sent house values skyrocketing. Even shacks now command bids well north of seven figures. Houses that might have sold for $40,000 in the 1970s can easily go for $2.5 million today.

Compounding the trouble, California is constitutionally unable to tax much of this wealth. In most states, rising house values would mean higher property taxes. But California’s Proposition 13, a 1978 ballot initiative that sets real estate taxes at 1 percent of a property’s sale price and limits annual increases to 2 percent per year, means that property-tax revenues don’t rise proportionately with home values. With house prices increasing many multiples since 1978, Prop 13 has produced one of America’s most arbitrary state tax systems. Its terms reset only when a home is sold or rebuilt, so it’s common for neighbors in identical houses to pay dramatically different tax bills. Property owners have no incentive to sell, downsize, or host additional housing units as costs rise.

California homeowners’ opposition to new housing construction is entirely consistent with the behavior predicted by urban economist William Fischel’s “home-voter hypothesis.” Fischel’s work suggests that homeowners—or “home voters”—will make use of the state and local political process, particularly zoning, to prevent any development that might devalue their homes, which are usually a household’s primary source of wealth. For instance, if a multifamily building is proposed in a municipality otherwise characterized by single-family housing, we may expect a homeowner to resist the development on the premise that an influx of new families could overburden public schools or worsen traffic congestion, or express fears that new rental housing might threaten “community character”—thereby lowering home values. As SB 50 would greatly enhance the freedom of property owners to build multi-family housing, it is easy to see why it would be unpopular in low-density suburbs like La Cañada Flintridge.  

Short of repealing Proposition 13, which is unlikely, one way around the home-voter quandary would be to weaken the bond between home values and school quality. If families were freer to pursue higher-quality schooling options untethered from their place of residence, we would expect to see fewer bidding wars for homes in top-tier school districts, leaving home voters less defensive about the risk of newcomers. School vouchers, charter schools, and an open-enrollment policy that lets students attend public schools outside their district of residence could decouple housing costs from school districts. The state could achieve similar results if its selective public universities placed greater weight on the economic integration of an applicant’s high school in their admissions criteria, giving homeowners in prestigious school districts a reason to welcome new multifamily housing that improves the “adversity scores” of local schools.

At the federal level, phasing out hefty tax subsidies for homeowners would also reduce resistance to housing growth in supply-constrained California. Fischel suggests eliminating the preferential treatment of capital gains on sale of a primary residence, which allows for the exemption of hundreds of thousands of dollars of profit. This would reduce the benefit that homeowners derive from exclusionary zoning, while discouraging the unhealthy practice of concentrating wealth in housing, which, again, drives excessive risk-aversion to changes in local land use.

Eliminating the state and local tax deduction (SALT) would work to similar effect. The Tax Cuts and Jobs Act of 2017 took a positive step in restraining the SALT deduction, but full elimination would further reduce the benefits of restrictive zoning practices by ensuring that homeowners pay more of their property taxes as home values rise.

Beyond education and tax policy, weakening home-voter impulses could also require some concessions on local control. Christopher Elmendorf proposes a compact between state and local governments in which the state would set quotas for housing growth, but the municipalities would choose their own zoning reforms to meet them. Once a municipal plan gets certified by the state, it would supersede the adoption or enforcement of any contrary zoning provisions. Any municipality that fails to comply with its own plan would face financial penalties. Some affluent suburbs may choose to opt for penalties over compliance, but the option of paying for exclusivity might prevent richer communities from blocking passage of the proposal.

In the end, SB 50 is no more dead than its predecessor bill, SB 827, which similarly sought to permit multifamily housing near transit lines. Neither the coalition built by the bill’s sponsor, State Senator Scott Weiner, nor the crisis that it aims to address are going away. But if housing reformers are serious about addressing the root causes of the home-voter impulse, they’ll need to plan for contingencies. SB 50’s foes are already rallying to introduce a ballot initiative aimed at entrenching local control of land use in the state constitution—an amendment that would all-but ensure that California’s housing crisis becomes permanent.

Brandon Fuller is Deputy Director of New York University’s Marron Institute of Urban ManagementNolan Gray is a city planner and a contributor to Market Urbanism.

This article was originally published by City Journal Online

Comments

  1. This article is pro our betters telling us where and how to live. The issues with California housing and availability were all created by the same officials who want to fix it (by making all our suburbs into Manhattan circa 1970s). The only reason LA isn’t Detroit is because of our natural beauty, but soon that won’t be enough. https://www.dailynews.com/2018/08/20/our-elected-officials-shoulder-much-of-the-blame-for-californias-homegrown-housing-problem/

  2. Donald J. says

    It was killed by the same agenda that is killing off California as a whole.

  3. Property taxes were created to provide money to the government to pay for the government services provided to privately owned property. That concept has been long forgotten as this vast amount of money disappears into the abyss of a socialist run general fund.

    • So tired of people bashing prop 13. More taxes aren’t the answer. Look at how the state is run by socialist democrats. More regulations, more free stuff and much of it for people who aren’t even citizens, and higher taxes is all they understand. Until that changes, California is in trouble.

  4. what a biased bit of reporting. California can’t ‘tax’ the ‘windfall’?? Zoning ‘reform’. Almost every time a house sells it gets reassessed to full market value and is Taxed at that value. Zoning Reform is only in the eyes of the writers. It is not reform to take single family home neighborhoods and create the right to high rise units removing the quality of life from the remaining single family units as the high risers not only shadow the house, add significant traffic to a street designed for SFR neighborhood, and create a different demographic of resident experience. Then add the that the City will also allow the high rise to built with little or no parking and guess where the parking will happen …in front of the houses remaining…

  5. Close the borders. Stop growing the teachers unions with K-12 classes filled with illegals. You don’t have a “housing crisis” when you leave the back door open and illegals have 5-6 children each; you have a self-inflicted stupidity problem.

  6. JLSeagull says

    What a waste of words. Blaming the demise of SB 50 on “home voters” is a crock of crap. There was no general uprising of home voters contacting their legislators. The real cause of the demise was the individual cities and towns telling their legislators to “take SB50 and shove it.” The simple fact is that the individual communities didn’t want the state telling them how they were to set their zoning, legislative “compromise” or not. Zoning should remain a local issue with absolutely no interference from the state. Who better to design zoning to meet the individual characteristics and needs of the a community than the elected leaders responsible to the people themselves.

  7. Last election we got a Dim Mayor and City Council. The bike lanes are in and the developers and builders no longer have to provide a parking area for the apartments they are building. This forces people to park on the street wherever they can find a spot. The result is a nightmare. I think we would be better off without any government than what we have now. While I have you here, does anyone need any illegals?

  8. Gotta Gedada Displace says

    In Kalifornia, any time the word “reform” appears related to legislation, you can cross it out and write in “Revenge”, so long as the corrupt, screeching unruly children of the Uni-party remain in control. Fixed it for ya.

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