Berkeley Poised to Address Affordable Housing Crisis With New “Landlord Tax”

Berkeley, California, has long been a bastion for artists, intellectuals, and their progressive ideals. It is home to UC Berkeley (3rd-ranked university in the world), which hatched the politically seminal Free Speech Movement, as well as Telegraph Avenue and People’s Park, epicenters of the counterculture movement of the later 60s and early 70s, and the first enactments of a number of progressive policy measures including a soda tax and the first handicapped-accessible sidewalks. Now, however, skyrocketing housing costs are threatening Berkeley’s inclusive character, as the rising cost of residential rental housing space forces more and more lower and middle-income families to leave.

In 2010, the average monthly rent for a new apartment in Berkeley was $1,975. Today, that number stands at $3,308, a staggering 60% increase in just 6 years. With Berkley’s median household income of $65,283, such staggering rents can easily consume two-thirds of a family’s gross income, leaving little money for other expenditures.

Housing costs in Berkeley are being inflated by forces affecting the entirety of the San Francisco Bay: a burgeoning population, an increase in the number of well paying jobs, and a lack of new housing construction chief among them. A recent survey revealed that 78% of Berkeley residents believe affordable housing is the number one issue the city should be tackling. Elected officials are starting to take action.

 

CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=63118
CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=63118

 

In early June, Berkeley City Council unanimously approved a November ballot measure to levy a 1.8 percent gross-receipts tax on landlord rents. The tax, if passed by voters, is expected to raise $5 million annually, which would then be spent on affordable housing projects. It’s a clever way of circumventing California’s Proposition 13 which, along with a long list of municipal revenue limitations, caps the amount that real estate (encompassing both land and buildings) can be taxed at 1% of market value.

Low taxation on real estate–or, more to the point, on land values–effectively encourages the purchase of land for the sole purpose of speculation. Low property (land value) taxes paired with high taxes on improvements (structures) discourages commercial or residential development of that land, as rising land values reap financial reward for property owners without their having to undertake the risk and trouble of adding any improvements. Often times this means there is little, if any, incentive for property owners to build the quality low-cost housing needed by growing communities. In turn, they benefit from the resulting artificial housing scarcity much more than active building ever would.

In response to these condition and their effects, Stephen Barton, Berkeley’s former Director of Housing, has become a major proponent of what is being dubbed the “landlord tax.” Barton, drawing from the ideas of Henry George, explains that landlords are not creating the value that is leading to skyrocketing rents. Land values are a social product, directly inflated by a growing population and its subsequent economic development, which, in the case of the Bay Area, has in turn been buoyed by the region’s diverse culture and ample public infrastructure.Proposition 13’s limiting effect on the land portion of property taxes has enabled landlords to privatize this socially-created value for their own personal profit.

 

Joe Mabel [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia Commons
Joe Mabel [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia Commons

At present, Proposition 13 allows landlords in Berkeley (and all across California) to capture the increasing land values. When a tenant leaves a unit, even if it is rent-controlled, a landlord has the opportunity to increase the rent as much as the market allows. As a result, landlords have increased overall rents by $100 million annually, an amount well beyond what constitutes a fair return on investment.  “This has been a massive income transfer from tenants to landlords,” Barton said. “It’s deeply hurtful to low-income people.” The result of this excessive transfer of income also serves to gentrify the poor right out of Berkeley.

The this new landlord tax is a distortion of land value taxation (LVT). LVT was originally proposed by American political economist Henry George, who recognized that land values are a social product (affected primarily by the size and productivity of the nearby community) and should be taxed so that their value can be returned to the community. The difference between LVT and the landlord’s tax arises when considering raw, vacant and underdeveloped land. LVT is a tax on land values, independent of improvements, that provides incentive for landowners and landlords to put all land to its best use. By comparison, the landlord tax depends on gross receipts, punishing those that increase tenancy and rewarding that hold their land idle, which is not a good way to encourage walkable and well-maintained communities with ample housing.

Taxes on land, in comparison to the ubiquitous tax on improvements we have in the United States, has been shown to actually increase the supply of both residential and commercial space by preventing the privatization of of socially-created land values by landlords. A sufficiently high LVT makes the ownership of land expensive, which then forces the landowner to develop the rental space needed to pay the higher land value tax. Conversely, the tax on improvements has the opposite effect, penalizing the construction of rental space by increasing the amount of one’s property taxes at pace with an increase in building.

 

"Trust Your Struggle" via photopin (license)
“Trust Your Struggle” via photopin (license)

 

The Berkeley Rental Housing Coalition, a landlord’s organization, says the proposed tax is too burdensome. They plan to put a similar, albeit smaller, tax proposal on the November ballot. Charlotte Rosen of East Bay Housing Organizations fears that two landlord tax measures on the ballot could split the vote and cause both measures to fail, which would be the landlords’ first preference. If the landlord tax measure proposed by the Berkeley City Council passes, cities across the Bay Area will be watching closely to see whether the new policy does actually stem the housing crisis.

Interested in helping Berkeley City Council pass this measure? If you are local, contact the Council and see how you can help get the word out! Another way to help would be to modify Proposition 13 to avoid loophole abuse by helping organizations like Make It Far and Daughters for Charity.

The best way, though, to help everyone would be to support broad implementation of Land Value Taxation, which may well require altering or even repealing Proposition 13. Everything else is either a band-aid or a half-measure.

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2 thoughts on “Berkeley Poised to Address Affordable Housing Crisis With New “Landlord Tax””

  1. Our campaign web site is http://www.fundaffordablehousing.org for those who would like to learn more, contact us or contribute to the campaign.

    This measure will not “solve” the affordable housing crisis, but it will help. It will recapture a small fraction of the windfall profits from rising rents in Berkeley and spend the money to create permanently affordable rental housing whose land is socially owned through non-profit housing organizations, land trusts, and limited-equity cooperative instead of being subject to the market. This helps spread the basic principles that land values are created by the public and that the public has the right to recapture the value the public creates. We will not get to land value taxation without smaller reforms that help educate the public and demonstrate its value.

    One additional point, the proposed tax contains a twelve-year exemption for new rental housing so as not to discourage new construction.

  2. A new tax of any kind is a “political disaster” and completely unacceptable to anybody who is connected with changing the form of government. We need to change its name and introduce it in a way that the landlords will love rather than hate. I have just suggested how. Here is a copy of what I wrote:

    The law should changed to inhibit the inheritance of land or its transfer by sale to a new owner. There is no need to tax its value. Instead, the government should buy the land and pay the endowed person or past owner for the land at its normal price. The land should then immediately be leased to the same person (who has the first refusal, due to the possible building on it which would also be endowed or sold in the usual way), or anyone else after first refusal. Leasing fees (which are similar to LVT) will cover payments by government for purchases of more land, as it becomes available for transfer. The government will need some returnable loans too! Then landlords will not be able to object to a tax being forced on them (and the term land-tax itself will cease, because of its true nature, which is a revenue or lease-fee). After about 40 years of this, much of the land will be owned and leased by the government. Registration and access rights to buildings are on condition that the lease-fee is being paid!

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