Houston Strategies

Impact of tax caps on the housing supply

An article in the NY Times a couple weeks back focused on California having the 11 least affordable places to live in the nation. No news there. But what caught my eye was their trace of one of the root causes for the housing crunch out there:

Another quintessentially California issue is Proposition 13, the 1978 measure that slashed property taxes by more than 50 percent and ignited a national property tax revolution.

The measure, which was supposed to facilitate home buying, has backfired to some extent; local governments prefer that land be used for retailing rather than housing because they collect more from sales taxes than from property taxes.

"Proposition 13 is a big stop sign saying 'no housing needed,' " said Peter Dreier, professor of public policy at Occidental College in Los Angeles and an author of "Place Matters: Metropolitics for the 21st Century" (University Press of Kansas, 2001). "Every municipality is engaged in a bidding war for retail — they're battling for Wal-Mart, to keep the libraries open."

It is unlikely that will change, Professor Dreier and others say, calling Proposition 13 "the third rail of government — it's untouchable."

Otis White expands on the problem in a footnote to his post on extreme commutes:

These miserable commutes are, of course, the result of communities that refuse to allow housing to be built at prices that people of moderate means can afford. The tragedy is that such housing could be built without subsidies in almost any American city or suburb by allowing developers to increase densities. But local governments, under pressure from neighborhood associations, refuse to allow such housing to be built, and carpenters, office workers and construction consultants are forced into these terrible treks to afford a place to live.

So you can see that there's already a natural pressure to restrict housing supply even without property tax caps, but that the caps exacerbate the problem even further. It's one those second-order consequences people don't consider when there's a call to cap property taxes. Houston has a growth cap in place now that seems reasonable (assuming inflation doesn't spike up too much), but I think we should be very wary of tightening it any further at a local or a state level.

More on property tax cap risks here, here, here, here, here, and here (a blatant case of overlinking, but there are a lot of risks).

The housing affordability map doesn't come through to Blogger very well, but you can see a larger version here.

posted by Tory Gattis @ 7:35 PM