The Norwegian Model: Managing Resource Wealth for the Common Good

Natural resources play a foundational role in a country’s economic development. As natural commons, they provide economic assets via space, raw materials, and energy that can be used to create other assets and opportunities in the form of industry and wealth. But because these commons are finite, their mismanagement often leads to a boom and bust pattern of economic development. Norway, however, has set a solid example for how to properly manage natural resources, including one of the most sought after – fossil fuels.

In the 1950’s, European countries began to speculate that vast oil and natural gas deposits lay under the North Sea. This theory was confirmed in 1959, when the largest natural gas field in Europe was discovered in the Netherlands. Excitement grew around potential future discoveries, particularly in the area of Norway’s continental shelf. Anticipating the discovery of reserves, the Norwegian government passed legislation in 1963 stating that the State owns all natural resources. The legislation also stated that the government is the only authority that can grant licenses for exploration and production. This legislation put Norway’s natural commons firmly into the hands of its citizens.

This turned out to be smart planning. In 1969, oil was discovered in Norway’s continental shelf. Oftentimes, nations turn to free-market economics, an approach that consistently fails to allocate the wealth derived from natural resources efficiently. Instead, Norway sought a different strategy to ensure that this natural commons provided long-term wealth to the entire country.

Initially, the Norwegian government gave private energy companies limited licenses to explore and tap Norway’s reserves. These companies can be credited with developing the country’s first oil and gas fields. However, in an effort to maximize national revenue, in 1972, the government moved quickly to create a government-owned petroleum company called Statoil. From that point forward, any foreign energy company granted a license was required to split 50% of the work with Statoil.

photo credit: L.C.Nøttaasen Yme platform via photopin (license)
photo credit: L.C.Nøttaasen Yme platform via photopin (license)

Norway’s fast action prevented the privatization of its natural commons and secured its oil wealth for its citizens. The government credits oil wealth with the creation and sustainability of their welfare state and support of macroeconomic development during downturns in the petroleum industry.

In the 1990’s, the government created the Government Pension Fund – Global (GPFG), informally known as the Norwegian Oil Fund, as a place to deposit all excess oil profits. The value of the fund stands at a staggering $850bn, and officials estimate that sum will surpass $1 trillion by the end of 2019.

So what has Norway been doing with all this money? Well, not much. And that is the point. The government capped annual withdrawals at 4% in order to prevent hyperinflation and to secure a surplus of money to survive in a looming post-fossil fuel world. This decision has proven wise recently as a drop in oil prices has moved Norway to declare its petroleum industry in crisis.

Norway’s natural commons management is a shining example of the prosperity that results when revenue from national resources is shared by all citizens. Norway has used this wealth to create social and economic programs that help each citizen. This wealth has also built a massive pension fund that can support the country during periods of economic hardship. It is a powerful equalizing tool not often seen in nations rich in oil and other natural resources.

photo credit: Jean-Paul Navarro The Grand Harbor via photopin (license)
photo credit: Jean-Paul Navarro The Grand Harbor via photopin (license)

Some economic scholars draw comparisons between Norway’s approach to natural commons (referred to as “petro populism”) and the theories of Henry George. Henry George, an American economist and political theorist from the 19th century, postulated that land is social commons, and that the profits drawn from land should be shared by all citizens via the use of land value taxation (LVT). In the case of Norway, they have taxed the revenue drawn from oil rich land at the very high rate of 78% and both redistributed and saved that revenue. In addition, they have carried over such sustainable thinking towards other natural resources, such as lumber and fisheries, and seen the same successes as with petroleum.

Resource-rich nations should take lessons from Norway on how to fully profit from and intelligently invest revenues from the utilization of our natural commons. The discovery of lucrative resources can inevitably lead to a boom and bust economy. Avoiding that requires managing those resources appropriately and wisely, as the Norwegians have, by using wealth derived from them to create an equitable and healthy society for all.

But all nations, whether “resource-rich” or not, have at least one socially-created resource of enormous value which can be tapped: the rental value of land.

Audio podcast on Norway and it’s oil management system. Courtesy of NPR online.

Featured Image: photo credit: arbyreed  via photopin

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Kim-Mai Cutler – The San Francisco Bay Area: A Modern Housing Crisis

This past July, Earth Sharing organized an event in Oakland, California entitled: BIL Oakland 2016: The Recession Generation. The aim was to help millennials navigate the uncertainties of economic life in the aftermath of the financial crisis. One of the speakers at the event was Kim-Mai Cutler, a technology reporter and columnist for TechCrunch, best known for her work on the intersection of technology and culture in the Bay Area. Cutler has worked for Bloomberg, VentureBeat, and the Wall Street Journal.  In the talk below, she discusses the insights of history on the Bay Area housing crisis.


Special thanks to Robert Schalkenbach Foundation, BIL, Cohousing California, The Henry George School, Edward Miller, Frank Ortiz, Alex Wagner Lough, Raines Cohen, David Giesen, Alodia Arnold, Christine Peterson, Christy Fair, Patricia Mikelson, Betsy Morris, Nate Blair, and all of the speakers and amazing volunteers! If you don’t see your name added here or at the end of the video, we apologize. Please send us a note and we will add you. We just wanted to release the video as quickly as possible.

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EarthSharing.org on Stanford Radio KZSU 90.1 FM Promoting the Recession Generation Event

WKZSU 90.1 FM Stanford University Radio Interviews EarthSharing.org

 

July 5th, 2016, Edward Miller and Jacob Shwartz-Lucas were invited onto Stanford University Radio to discuss an event they would organize in Oakland a few days later. The event was titled BIL Oakland 2016: The Recession Generation.

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The discussion revolved around the event’s aim of helping young adults to navigate the challenges of living in our harsh economic climate and rapid technological disruption.

Jacob and Edward discussed their motivations for putting on the conference. This included explaining their backgrounds, and what changes they want to see in the world.

photo credit: Jane Says via photopin (license)
photo credit: Jane Says via photopin (license)
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Chinese Investment in US Real Estate Tops $110bn

The lessons of the 2008 financial crisis are quickly being forgotten. That market collapse was precipitated by an extraordinary rise of US land values, which was driven by the emergence of subprime lending on a mass scale.

Prices of residential and commercial real estate are once again on the rise. A major driver of this astounding rebound has been Chinese real estate investment. Chinese investors, seeking promising investments and a way to move their money out of the slowing Chinese economy, have poured $110 billion dollars into US real estate in the past five years. By contrast, the Chinese real estate market, which is putting a drag on the Chinese economy, has been called by many the largest land bubble in history. Chinese investments in the US market are inflating housing prices across the country and placing home ownership further out of reach of many Americans.

Over the past several years, Chinese investment in commercial properties has captured headlines. For example, in 2015, the Anbang Insurance Group purchased the Waldorf Astoria Hotel for $2bn and attempted to purchase Starwood Hotels for $14bn. However, the vast majority of Chinese speculative investment has been in the residential market, to the tune of over $93bn. Cities with the most rapidly rising housing costs–San Francisco, New York, Los Angeles, and Seattle–are popular markets with Chinese buyers. But as housing stock across the country continues to gain value, buyers are now turning their speculative intents to Chicago, Miami, and regions of middle America.

Chinese buyers are eager to speculate in the US real estate market. Not only because they see a lucrative investment opportunity, but because of concerns about the slowing Chinese economy. As the economy continues to slow and the value of the Yuan falls, citizens are eager to move wealth abroad and into dollar-backed assets, particularly in the form of land speculation. Despite efforts by the Chinese government to encourage domestic investments, speculation in US real estate by Chinese nationals is expected to exceed $200bn over the next 5 years.

photo credit: IMG_0953 via photopin (license)
photo credit: IMG_0953 via photopin (license)

When people speak of rising real estate prices, they certainly aren’t talking about bricks, they are talking about land. As a consequence of all this land speculation, Americans are finding it harder to obtain affordable housing and commercial space, and not only because of rising prices. Close to 70% of Chinese buyers pay cash, which is more appealing to sellers because deals can close much faster. This puts US residential buyers who require a mortgage at a disadvantage. Bidding wars with deep-pocketed foreign speculators also has the effect of pressuring US buyers with more limited liquid assets to sign off on larger mortgages than they can financially handle.

Prospective home buyers are not the only ones feeling the crunch. As homeownership becomes more unaffordable, the number of people in the rental market increases, driving up rents across the country. In 2016, rent increases are expected to outpace wage increases by about one percentage point. Faster than the general rate of inflation.

The periodic bubbles in real estate markets are a symptom of this rush to pocket the rising value of land, whether by foreigners or citizens. So far, the United States is not taking steps to curb either domestic or foreign speculation in real estate. Instead, Congress is going in the opposite direction by encouraging foreign “investment” in US property.

However, other countries are taking a stand. Hong Kong and Singapore have instituted a 15% tax on properties purchased by foreign buyers, a move that has slowed the rise in housing costs. Citing decreasing affordability of homes, Australia has instituted a similar tax. The Australian government also used legal means to intercede in the attempt by Chinese investment group Dakang Holdings to purchase the Kidman Farm empire, which controls 1.3% of the Australian landmass.

photo credit: Lavender Valley 2407 via photopin (license)
photo credit: Lavender Valley 2407 via photopin (license)

An alternative to such measures, which numerous eminent economists recommend, is a tax on land values. Land value taxation (LVT) is a twist on conventional property taxation, whereby improvements to the land are not taxed, but the land itself is taxed. Proponents argue that we ought to shift as much taxes as possible away from productive activity and onto land values. While other strategies would serve to limit foreign land purchases, taxing land values would actually halt idle landholding in general by making the speculative ownership of raw or underdeveloped real estate unprofitable.

When markets are operating correctly, profits are simply a return for productive activity, not a windfall that is achieved by excluding others as with the landed gentry in the feudal era. With LVT in place, Chinese or other foreign investors who wanted to make money by purchasing land would have to actually develop that land. They would need to attract residential or commercial tenants by providing desirable amenities and reasonable rents, and shouldering the risks involved in any sort of productive activity.

This would result in a growth of construction activity and an increase in US housing supply. Increased construction activity and decreased cost for commercial and residential real estate would stimulate the rest of the US economy, simultaneously decreasing unemployment and raising wages.  In effect, taxation of land values would convert the current Chinese desire for US land into a sustainable means of growth for the US economy.

Featured image photo credit: Light River via photopin (license)

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What if you lived rent-free?

Imagine if you did not pay rent for an apartment, or taxes on your wages. Think of all the excess income you would save, invest, use to take a vacation, learn a new skill, spend on an altruistic project, etc. What would you do with the money?

 

Beach Sunrise Punta Cana via photopin (license)
Image Source via photopin (license)

Some people actually have this luxury. They don’t have to pay rent or a mortgage. They own their apartment building, free and clear, and the property taxes they pay are minuscule. The value of the land under their New York City apartment building just goes up and up in value. As this happens, they are able to charge their tenants more rent.

Good for them, right? But do you know what that means for you? Your rent goes up and up too. It’s not like the landlord really had to renovate your apartment to charge you more. It’s not that they had to build more units to get more rental income. It’s not that they necessarily worked any harder than you. The value of their land just keeps going up, and that means that you are subsidizing their increasingly luxurious life style.

 

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photo credit: Donald Trump via photopin (license)

They have money to see a Broadway show and vacation in France precisely because you have to struggle to pay the rent. Wouldn’t it be fairer if everyone paid rent for the space they claimed? If they paid taxes on the rising value of their land, we could use that money to offset taxes on working and exchanging.

 

2016 Commencement via photopin (license)
Image Source via photopin (license)

Imagine if you did not have to pay taxes anymore, and instead, when your landlord collected your rent, they covered those taxes for you with the rent money? It’s not like you would pay any more rent either. In fact, you would likely pay less.

What would you do with all the taxes you saved? What vacations would you take? What new skills and educational opportunities would you seize? What worthy causes would you give to? What Broadway shows would you see? This would all be possible if we lived in a world where land was the primary source of public revenue.

 

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Can Tiny Homes Solve San Francisco’s Housing Crisis?

“Tiny homes,” residential structures that typically measure between 100 and 400 square feet, have been touted by some as an elegant solution to de-cluttering one’s life and embracing a minimalist lifestyle. Examples have graced the pages of every prominent home and garden magazine, and HGTV has three (yes, three!) shows dedicated to tiny homes. In San Francisco, housing activists and city planners are now looking to the tiny home movement as a potential tonic to the city’s worsening housing shortage.

With a vacancy rate at 0.3% and a population influx to the Bay Area to the tune of approximately 90,000 people per year, San Francisco, known for its stunning Victorian homes and hilly streets, is running out of housing. Chelsea Rustrum, a consultant on the sharing economy, believes that tiny home villages have the potential to increase housing inventory at a greatly reduced cost. Compared with the $1000-per-square-foot cost for traditional construction, the per-foot cost of constructing tiny houses falls between $200 and $400. Eager to develop the first tiny home village in the San Francisco Bay Area, Rustrum has assembled a team of 10 people and is scouting for a plot of land. However, she has run into a problem that plagues most new housing initiatives – zoning.

The tiny homes that Rustrum and her colleagues seek to build violate a number of common zoning rules as set by the International Code Council, a domestic trade group. Most notably, they are below the minimum square footage necessary to be classified by as a residence. Rustrum hopes to overcome such zoning obstacles through negotiations with city governments, but changes to zoning laws have become a flashpoint in the debate over the housing shortage and development in the Bay Area. Homeowners consistently try to stymie new construction because they assume that an increase in population density would decrease their own property values. (In actuality, the opposite effect has been shown to occur: increased population leads to increased land values.)

 

Tiny Houses via photopin (license)

 

Even if zoning obstacles were overcome, could the construction of tiny home villages truly reign in the careening San Francisco rental market? Eric Fischer, a San Francisco resident, recently analyzed 30 years of rental prices (the median rent for a 1-bedroom apartment having reached an astonishing $3,500) and created a model that explains housing costs in the city. According to Fischer, it would take a 53% increase in the housing supply (200,000 new units) to reduce costs by two thirds. Given that the entire land area of the city is 7 x 7 miles, most of which is developed, tiny home villages do not pose a realistic solution in San Francisco County, because there just isn’t enough unused land to construct them on.

The Bay Area, by comparison, is comprised of multiple cities, some of which have far more available land than San Francisco. However, there is concern over the effect tiny home villages would have in these areas A criticism of proposed tiny homes developments is that, though less environmentally damaging than traditional tract home developments, they still represent a form of urban sprawl. And more sprawl is not something that the Bay Area can handle right now. The area’s burgeoning population is already crushing public infrastructure. Bay Area Rapid Transit (BART), a major transportation system, has $5 billion in unmet capital needs over the next 10 years, and interstate highway commute times are at all-time highs. Any housing solutions that place people further outside of urban centers could add pressure to already strained transportation infrastructure.

 

Nothing Gold Can Stay via photopin (license)
Nothing Gold Can Stay via photopin (license)

 

With this in mind, it would seem that any new housing construction should occur where economic activity is most concentrated: downtown San Francisco. Problematically, downtown areas tend to have the greatest land values, and traditional strategies for construction in the city center tend to be very expensive (using subsidies and eminent domain), politically treacherous (due to entrenched residential and commercial landlord interests), and ultimately ineffective. While tiny home developments might make the area more affordable for a handful of individuals and families, to effectively turn the tide of this crisis and resolve the housing shortage, government officials must take steps to build up housing inventory in urban centers, particularly in downtown areas near the business district. To this end, the city and state must consider a land value tax (LVT).

American political economist Henry George hypothesized that both property taxes and taxes on the value of improvements (structures) discourage new construction, as any residential or commercial development will result in higher overall property taxes. To expedite construction, Henry George recommended eliminating taxes on improvements and shifting the revenue burden towards higher land value taxation (LVT), which would encourage landowners and developers to increase residential and commercial space in order to pay the land value tax while providing them a respectable return as they provide value to others. LVT naturally becomes even more effective wherever land values are higher, such the urban core of cities. Implemented in cities, LVT leads to a substantial increase in both living and working space.

California faces a unique challenge due to the limits imposed by Proposition 13. Overcoming those challenges in the long term would require a difficult–but not impossible–voter-approved constitutional amendment to completely overhaul the property tax system. State legislators as well as regional and city planners would be remiss not to consider the solution of the LVT, which has had demonstrated success in increasing residential space the United States as well as abroad. For the moment, housing advocates have their eyes on Rustrum and her tiny home villages, a pop culture trend that could provide a short-term solution to a steadily worsening housing crisis.

Cover Image: Boneyard Studios. Licensed under a Creative Commons Attribution-NonCommercial 4.0 International LicenseCreative Commons License

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London Congestion Tax Reduces Traffic Pollution While Improving Infrastructure

Is traffic a daily problem for you? Bad news: If you live in a major metropolitan area, chances are that traffic congestion is only going to get worse. The nation’s roads and highway systems are being crushed as Americans flock to urban areas for economic and social opportunities. In the San Francisco Bay Area alone, traffic on some highways has increased over 25% in the past 5 years. With a cost to Americans of $124 billion a year, plus the unquantifiable impact on quality of life, cities must take action to abate worsening traffic congestion. For some ideas on how to do that, they should look to London.

London is a global financial center with a burgeoning population of over 8 million. As London’s economy and population ballooned in the 1990s, so did traffic, earning the city its reputation as one of the most congested cities in Europe. Government officials took notice and hatched a plan to reduce traffic in the city center, boost ridership of the London Tube and buses, invest in public transportation, and improve quality of life. Their solution? A congestion tax.

 

 

Piccadilly Circus via photopin (license)
Piccadilly Circus via photopin (license)

 

Officials in London created a “congestion zone,” which motorists are charged for entering. First implemented in 2003, this tax was introduced at £5 per day and has since risen to £11.50. Resulting tax revenues, amounting to over £200 million in 2008, have primarily been invested in public transportation improvements. The number of public buses has increased, bus routes have been modified to take advantage of reduced traffic congestion, and roads and bike lanes have been improved.

13 years after its implementation, the congestion tax has been hailed as a success. The number of cars entering the city center has plummeted by 34%, traffic speeds improved between 20 and 30%, and bus ridership increased by more than a third.

The benefits of the tax are not limited to improvements in transit times and increased use of public transit; it has also been a powerful tool for reducing the environmental impact of transportation. The tax has reduced CO2 emissions by a total of 100,000 tons annually, cut fuel consumption by 40 to 50 million liters annually, and led to greater than 15% reductions in atmospheric levels of major air pollutants NOx and PM10 levels.

 

Buses and Bikes via photopin (license)
Buses and Bikes via photopin (license)

 

London’s success has inspired other cities to consider congestion taxes. Singapore and Stockholm introduced congestion taxes several years ago, and Beijing and Mexico City are in the planning phases. Efforts to implement congestion taxes in New York City have typically failed due to partisan gridlock, but have gained momentum in recent months.

London’s congestion tax is a powerful example of the positive urban development that occurs when revenue derived from the value of land is invested in public infrastructure. Traffic congestion is largely a consequence of economic growth, which is made possible by a city’s populace and infrastructure. Motorists enter London for economic opportunity. The congestion tax functions as a mechanism by which the city can capture a portion of the wealth earned by non-residents and create the incentives to effectively align self-interest with the public-interest.

A number of economic scholars have compared London’s taxation system with the theories of Henry George. Henry George, an American economist and political theorist of the 19th century, postulated that land is social capital, and profits drawn from land should be shared by all citizens via the use of land value taxation (LVTs). In the case of London, government officials are taxing the use of land by motorists and distributing that revenue to public works projects designed to increase the quality of life for the city’s residents.

As metropolitan areas across the world see traffic congestion worsen rapidly with intense development, a congestion tax is a proven solution worth considering. Not only will traffic decrease, but cities will be able to re-capture wealth generated by its land and use it to improve the city for all.

 

Cover Image: Street Art: Camden via photopin (license)

 

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The UK Can Harness Post-Brexit Foreign Investment for Economic Growth

Since Britain voted to leave the European Union, global markets have dropped and people have begun to prepare themselves for a grim possibility: a world with a less stable Europe. But to foreign investors, particularly those with an eye to real estate speculation, the Brexit vote seems to present a golden opportunity. With the value of the British pound falling to its lowest level in decades, overseas buyers have snatched up London properties at a massive discount, with the consequence of an even more overheated housing market.

Significant currency devaluations can have devastating effects on a country’s economy as the costs of imports and exports fluctuates and the risk of inflation increases. For foreign investors, however, currency devaluations create an opportunity to make strategic purchases within the affected country that would not have been feasible before.

Since a dramatic 12% drop in the value of the British Pound Sterling, investors from Hong Kong, the Middle East, and nations with currencies linked to the dollar have begun to buy property in the United Kingdom. This activity has been concentrated in London, where property sales have increased 38% since the Brexit vote. The percentage of recent purchases that have been completed by foreign investors is unclear, but property investment firm Benoit Properties International and real estate consultants Knight Frank have reported a significant surge in purchases by buyers outside of the UK.

 

Brexit Scrabble via photopin (license)
Brexit Scrabble via photopin (license)

 

Foreign speculation in the London real estate market is not new. As the financial center of the United Kingdom and a rapidly growing metropolis, London’s real estate has generally been a safe, albeit expensive, investment. Between 2008 and 2015, investors purchased £100 billion of property across the city. These purchases mean more than lucrative long-term investment strategies – they provide an opportunity for the wealthy of other countries to move their money overseas, a financial strategy that is becoming increasingly attractive as economies such as China’s falter.

None of this is good news for the average Londoner. Foreign nationals have been buying real estate at a faster rate than UK nationals for several years, a trend which has been credited with causing to the steep surge in housing costs in London. Last year alone, average London housing costs increased 10.6% to $681,500 for a single family home, more than twice the national average, which was itself excessive. Renters especially have felt this squeeze, as rents increased 12.5% in the same time period, reaching a staggering £1,500 per month for a 1-bedroom apartment.

Considering the continuing rise of the tide of xenophobia in the wake of the Brexit vote, it’s important to clarify that foreign investors are not the enemy. Rather, they are driven by an economic and real estate system that makes UK property investments lucrative and accessible. The dearth of opportunities to invest gainfully in growing commercial goods and services industries spurs investors toward land speculation, fostering the housing crisis that is unfolding not only across the UK but worldwide.

 

Brexit tea via photopin (license)
Brexit tea via photopin (license)

 

The UK’s leaders must enact policies to ensure that Londoners have fair access to affordable housing. As it turns out, they have many other countries to turn to for ideas. Hong Kong and Singapore have instituted a 15% tax on properties purchased by foreign buyers, which has slowed the rise in housing costs. Australia has instituted a similar tax, citing decreasing affordability of homes while also legally interceding in the attempt by Chinese investment group Dakang Holdings to purchase the Kidman Farm empire, which controls 1.3% of the Australian landmass.

An alternative to such measures proposed by many economists is the taxation of land values rather than traditional property taxation. While other strategies limit land speculation by foreign investors, taxing land values would actually inhibit all speculative land grabs by making the holding of real estate for that purpose unprofitable. Instead, by making the ownership of idle land prohibitively expensive, taxation of land values would spur construction on prime locations, which in turn would decrease housing costs for all.

If foreign investors wanted to make money by purchasing land, they would have to develop that land with residential and commercial improvements. In other words, they would need to put forth effort and bear risk in order to see any returns, just as business ought to work. This would result in a growth of construction activity, meaning more residential units available at lower prices. In effect, taxation of land values would effectively convert the current foreign appetite for British property into a sustainable means for growing the British economy.

 

Has City of London lost its voice with Brexit? via photopin (license)
Has City of London lost its voice with Brexit? via photopin (license)

 

The movement to leave the EU garnered strong support in part for its assertion that too many UK citizens are being left behind economically in our globalized society. As uncertainty shakes the British economy, that problem will likely get worse. UK leaders must act immediately and decisively, and use the tax system to address the disparities caused by land speculation.

 

Cover Image: Dis United Kingdom [Explored] via photopin (license)

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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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Housing Advocates in New Orleans Take on Short-Term Rentals

Eleven years after the federal levee failures following Hurricane Katrina ravaged New Orleans, the city’s tourism industry has rebounded to pre-storm levels. In 2014, 9.52 million people visited New Orleans and spent a total of $6.81 billion, the highest recorded tourism spending in the city’s history. But while the revenue from increasing tourism has been a boon to the city’s economy, the market for affordable housing has been strained as property owners and investors increasingly convert residential properties into short-term rentals.

Short-term rentals are furnished homes rented to tourists as an alternative to hotels. Although they have existed for some time, websites like Airbnb and VRBO, which make it easy for homeowners to connect with those seeking accommodations, have led to a rapid proliferation of short-term rental units over housing for the city’s workers. While they benefit property owners with a source of additional revenue and are often less expensive for tourists than a hotel, these short-term rentals are decried for straining the housing market in cities with limited housing stock.

This trend suggests that homeowners, despite the city’s economic resurgence, are finding it necessary to generate additional income. This may result partially from a lack of economic opportunity in other sectors, forcing property owners to venture into the short-term rental market. New Orleans renters have also suffered displacement as investors and landlords, seeing bigger dollar signs in reach, convert entire properties to short-term rentals, often evicting long-term tenants.

 

New Orleans my love via photopin (license)
New Orleans my love via photopin (license)

 

Housing advocates across the country, particularly in San Francisco and New York City, have rallied against this practice, citing increasing rents and a trend of landlords removing properties from the residential rental market to use them solely as short-term rentals. In New Orleans in particular, where rents have increased 20% over the past 14 months, shrinking housing inventory is squeezing out the lower-income renters and prospective homeowners who are already struggling to find affordable housing.

Such short-term rentals, though prevalent, are illegal in New Orleans. Local ordinances state that an entire home may not be rented for a period of less than 30 days, and citations can result in financial penalties in the amount of $500 or more. However, the city lacks the resources and personnel to enforce these laws. Of an estimated 2,000 to 4,000 illegal short-term rentals, only 72 properties received citations in 2015.

New Orleans housing advocates, concerned about the effect of these rentals on housing stock and rising rents, have issued recommendations for how the city should manage these properties. They recommend that legal short-term rentals, defined as the rental of a room within a home versus the entire home, be subject to taxes, the revenue from which would be used to construct low-income housing. This would be equivalent to introducing a new sale/income tax hybrid for homeowners seeking to create the value or income that some need to make ends meet. For illegal short-term rentals, housing advocates are requesting assistance from sites such as Airbnb in identifying them and recommend that fines be increased from the current $500.

 

Hard Rock on Bourbon Street via photopin (license) The tourism industry in New Orleans is driven by the culture created by the permenant residents.
Hard Rock on Bourbon Street via photopin (license) The tourism industry in New Orleans is driven by the culture created by the permanent residents.

 

With rents rapidly inflating, New Orleans must take immediate and drastic action to ensure that housing remains affordable for its citizens. The proliferation of short-term rentals–and its negative effects–stems from the rising popularity of New Orleans as a tourist destination, the lack of alternative income-generating opportunities, and the lack of any incentive system for landowners to build the necessary structures to increase in the city’s housing capacity.

The current rise in land values, a socially-created product of the city’s diverse population, manifests as increasing rent, which is a major draw for landlords. This means that this increased value, created by the community, is being captured by landlords rather than the community itself.

The government must enact policies that re-invest the rising value of land (created by city’s permanent residents) back into the city for the people. The best approach would be to implement a sufficiently high land value tax (LVT) as originally proposed by American political economist Henry George. George recognized that land obtains its value from the government granting legal privilege to exclude others from a portion of our common inheritance, the Earth. It is thus necessary for those benefitting from this exclusive use to compensate those they exclude.

 

Street musicians in New Orleans
Dancing in the streets via photopin (license) Local street musicians are a major draw for tourists in New Orleans.

 

In comparison with the ubiquitous property tax (which includes a tax on buildings) common in the United States, LVT has been shown to actually lower speculation of both residential and commercial space by preventing the privatization of socially-created land values by landlords. A sufficiently high LVT makes the ownership of underdeveloped land expensive, which then makes it necessary for landowners to develop rental space to generate revenue to cover the higher land value tax–especially when the land is most valuable, as in any city. By contrast, the portion of the traditional property tax which falls on improvements has the opposite effect, penalizing construction of residential and commercial space by increasing the amount of one’s property taxes via the higher tax on improvements.
Without the developmental incentives of land value taxation, the success of New Orleans’ expanding tourism industry will continue crowding its underdeveloped housing market. The cruelest aspect of this is that travel and tourism workers, who are the backbone of the entire industry and often musicians and artists, often find themselves priced out of their own neighborhoods as the tourism industry that depends on their labor booms. Efforts to enhance the affordable housing supply, therefore, are essential to maintaining the stock of service workers, artists, and musicians who entice tourists to love, and go spend their money in, New Orleans.

 

Jim Fairchild of New Orleans Steamcog Orchestra
Photo by Michelle Gomez. Jim Fairchild of New Orleans Steamcog Orchestra
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