Housing has a lot going against it in the California. But amidst all the legal, political, and regulatory roadblocks, there’s one law that sneaks by largely unnoticed: Prop 98.
Prop 98 guarantees a minimum level of state spending on education each year. Sacramento pools most city, county, and special district property taxes into special education funds to meet this commitment. The localities only get to keep a small part of the property tax revenues for their own general budgets.
This system creates a disincentive for cities to permit housing. New housing brings in new residents who need city services. But it doesn’t bring in a commensurate increase in property taxes since most of that revenue gets scooped up by Sacramento.
Commercial development, though, brings in taxes a city gets to keep. Sales and hotel taxes are significant revenue streams. And they don’t cause the kinds of strain on city services that new residential does.
Reforming Prop 98 might be low hanging fruit. Changing the formula to appropriate a broader stream of city revenues might help ease the bias against housing. And it might even be possible to amend the law without having to fight the California Teachers Association. As long as there’s no net decrease in education funding, of course.
It’s tough to say exactly how much new housing Prop 98 actually prevents. Different cities get to keep different amounts of their property taxes, so the disincentive differs case to case. And there are plenty of other things like CEQA and Prop 13 which put a drag on new construction as well. But where CEQA and Prop 13 make it easier for residents who are already NIMBYs to gum up the works, Prop 98 is a reason in itself for a city to avoid residential development. So while we can’t do much to change the aesthetic preferences of our neighbors, we can do something to change the law. And if tweaking one law makes cities see new housing as a financial boon instead of a burden, it might be worth the effort.
dr saysApril 30, 2015 at 10:57 am
Roland Solinski saysMay 1, 2015 at 1:13 am
Prop 98 is intended to ensure equal distribution of education spending per-pupil, right? Assuming the property tax is the main means of supporting education, that means some areas are net donors, other are net recipients, largely based on the local property values. Areas with moderate to low property values then wouldn’t experience this same disincentive for new housing. This might be a beneficial side effect of Prop 98, if it pushes housing growth into areas where it wouldn’t otherwise occur.
Kenny Easwaran saysMay 1, 2015 at 10:41 am
Although doesn’t this just perpetuate the NIMBY dynamic of rich and expensive (and desirable) cities like San Francisco and Palo Alto refusing to construct new housing, and hope for poorer and less desirable cities to make up the difference? This is already what goes on within cities, because rich neighborhoods have a lot of power in their NIMBYism while poor neighborhoods don’t.
peterhsu saysMay 11, 2015 at 3:28 pm
I think it’s fair to say that this is a big problem on both the Peninsula as well as in the Lafayette-Orinda-Walnut Creek area. You have cities who are more than happy to clear the way for job-bringing development but have no appetite for new housing.