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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
New York City is the poster city for rising rents. Given current trends, don’t expect that to change any time soon. New York’s municipal leaders, however, have not been idle in addressing this. The City and State are actively pursuing measures such as implementing city-wide rent freezes to slow rising rents. Yet, with so much money at stake in the rental and leasing sector, there are those who seek to create and exploit loopholes. New Yorkers are now fighting back against a bill that, due to such a loophole, not only failed to preserve and improve affordable housing but gave landlords and developers millions of dollars in tax breaks.
In 1995, the New York State legislature sought to revitalize Lower Manhattan, which was riddled with aging buildings and had few development projects on the horizon. A proposed bill gave developers tax incentives if they converted old office buildings into apartments. In exchange for these tax incentives, landlords would limit rent increases, therefore assuring reasonably affordable housing stock for the foreseeable future. It seemed like a win-win situation for developers and tenants alike.
Hours before the bill was set to pass, Republican lawmakers pulled it from the voting schedule, citing the need to consult Rudy Giuliani, New York City’s mayor. Giuliani wrote a letter to Republicans stating that an exemption should be granted to units that initially rent for greater than $2,000 per month. Republicans reinterpreted the rent-stabilization component of the bill by introducing a reading of Giuliani’s letter into the public record just before the final vote. The bill, 421-g, passed 53-1.
Between 1995 and 2006, before the law expired, 421-g helped create close to 10,000 new rental units in Lower Manhattan. However, nearly three-quarters of those units were not rent stabilized because they initially rented for more than $2,000 per month. So while 421-g accomplished its goal of sparking revitalization in Lower Manhattan, it did not protect tenants as intended. And even though the law expired in 2006, some buildings continue to benefit from tax breaks that totalled nearly $75 million in 2015.
Some legal experts believe that developers have misused the law at a large cost to the city and tenants. Lawyers claim that the intent of the state legislature was to encourage the creation of rent-stabilized housing units by offering tax incentives. Therefore, having 75% of units created under this program exempt from rent stabilization not only defies the spirit of the law but is costing the city tens of millions of dollars each year in lost tax revenue.
There is substantial debate regarding whether or not the law has been applied properly, and it is centered around one major issue–namely, the exemption. The bill was not officially amended before it was passed to stipulate exemptions to units that initially rent for greater than $2,000 per month. That policy was instated by the attachment of the letter from Rudy Giuliani recommending the exemption.
Multiple lawsuits have been filed against landlords by tenants alleging massive rent overcharging. Decisions from the bench have been varied. In one instance, a judge ordered Skyline Developers to re-instate rent stabilization status on a number of its rental units, citing the Giuliani interpretation of the law as invalid. Another judge came to the opposite ruling on a similar case with developer UDR.
A number of other lawsuits are working their way through the courts, and legal scholars are hopeful that clarity will finally be reached regarding proper interpretation of the law.
That said, there are better ways to promote the creation and preservation of affordable housing units. Common Ground NYC activist Scott Baker argues the following:
If the city wants to have affordable housing AND new building AND condos people can afford to buy AND a reliable and large revenue stream to replace many if not most taxes, there is only one proven way to do this: The Land Value Tax.
It works like this: over a period of time, phase out taxes on buildings and replace them with taxes on location. This discourages hoarding and inefficient use of location because there is an increasing tax on that, while it encourages building because there is no tax on that (eventually).
Every location is to be taxed at its full rental value. This means more apartments, which means lower rents and costs due to competition.
The idea for taxing land values originated with classical political economists like Adam Smith and were popularized globally in the 19th century by two-time New York City Mayoral candidate Henry George. Today, economists refer to Land Value Taxation (LVT) as the most efficient of taxes, meaning that it is difficult (if not impossible) to evade taxation or paying what is owed to society. That’s because land, unlike money, cannot be moved, hidden or tax-sheltered, a quality that would have made LVT succeed where 421-g failed.
In retrospect, 421-g was designed to legislate additional affordable housing into existence–contrary to the demands of the market and their underlying forces, and regardless of any shortages this may cause. Rent controls also have the pernicious effect of privileging older residents at the expense of younger residents.
By contrast, the function of land value taxation is to make the ownership of raw and underdeveloped land prohibitively expensive. This encourages landowners to make use of the space in order to accrue the rental income necessary to pay the land value tax. Consistent with Baker’s statements, this would effectively turn the housing market into renters’ market due to the increased supply of housing and working space, leading to increased competition to attract renters. Thus,we could expect lower housing costs while realizing the improvement of the conditions of affordable housing. Ultimately, LVT achieves organically what 421-g was designed to accomplish artificially.
Laura Luevano, a homeless woman struggling with severe diabetes and arthritis, failed to find an apartment in Los Angeles after searching for several months–despite holding a federally subsidized rental voucher. She is one of more than 2,000 people in Los Angeles who remain homeless despite holding these rental vouchers. Her story represents one of many that demand a fair and just solution.
In Los Angeles, a city known for its pristine beaches and Hollywood glamour, 35,000 people are without homes, and the situation is not improving. Just last year, the homeless population increased by 5.7%, which has been deemed a crisis by Peter Lynn, the executive director of the Los Angeles Homeless Services Authority. City and state officials are hoping that rent vouchers will help abate this crisis, but that measure so far has shown poor results.
Rent vouchers are, in the eyes of officials, a quick and easy solution to the increasing homelessness problem. The voucher, subsidized by the federal government, can be used to pay rent to a landlord. But quick fixes often fail to provide long-term solutions, and the rent voucher approach has been no exception.
While vouchers increase the capability of the poor to access housing, they provide minimal incentive for landlords to increase the residential housing supply. Thinking in terms of supply and demand, vouchers serve to increase demand, but a lack of increase in supply to meet that demand ultimately defeats the program’s purpose. People tend to attribute the lack of supply to zoning and rent control–and indeed these issues are a part of it. However, the most overlooked factor is that the supply of land is fixed, and thus the owners can make an easier buck just sitting on undeveloped property and waiting for it to rise in value.
As a result of these simple market dynamics, recipients of vouchers are facing a harsh reality – the Los Angeles rental market is crowded and extremely competitive. LA County currently has very little housing inventory available for immediate rental – an incredibly low 2.7% rental vacancy rate. At a vacancy rate below 5%, the power dynamic between landlords and renters shifts dramatically towards landlords. Landlords can afford to be selective about tenants, choosing those that are least likely to fail to pay their rent. Often, the tenants that lose out are veterans and minorities.
These landlords have been reluctant to take on the homeless as tenants, citing concerns that they will be troublesome tenants and will fail to pay rent. But the County is taking action to erode these barriers by providing financial incentives to landlords. Through the voucher program, the city guarantees first and last months’ rent, as well as a security deposit, to landlords. Santa Monica County has gone a step further and gives landlords a $5,000 bonus for accepting rent vouchers.
In general, subsidies such as guarantees and bonuses have much the same effect on housing supply as vouchers. Subsidies of all kinds spur demand without any significant increase in supply, resulting in even higher rents for everyone. This goes to benefit landlords while hurting renters.
The city is educating landlords to reduce stigma and make the benefits of accepting vouchers clear. Vouchers are guaranteed rent, and voucher tenants have substantial support from the city in the form of case managers and tenant mediation, helpful in the case that a disagreement arises. The city also hopes that appealing to landlords’ sense of civic duty will increase their willingness to accept vouchers. Convincing hesitant landlords, however, is just one piece of the homelessness puzzle.The best additional measure would be one that encourages building more housing units.
Rent vouchers cannot be applied to 1- and 2-bedroom apartments that rent for greater than $1,150 and $1,500, respectively. With housing costs in Los Angeles soaring, and new rentals averaging $2,094 per month, federal vouchers cannot be applied to a large swath of available housing. Some counties have eased restrictions on these caps but have still not seen an increase in the number of voucher recipients renting apartments. This further validates the notion that this is a supply problem that calls for incentives to build the necessary units.
The voucher program is, in addition, actually squeezing low-income families that do not qualify for vouchers, creating a problem where there previously wasn’t one. When a homeless person receives a voucher, they are competing for the same rentals as low-income families, says Santa Monica housing administrator Jim Kemper. So while the program has had some success in taking homeless people off the streets, it is often at the expense of the working poor, making a bad situation even worse. Legal analysts have long criticized the City and State for focusing on voucher programs instead of building new units at the rate necessary to decrease rents. Ultimately, for the voucher program to succeed, Los Angeles must enact policies to ease its housing shortage.
To address the housing crisis, Los Angeles should consider implementing a land value tax (LVT) to replace its current, traditional model of limited property taxation, which may well require changing California’s constitution via voter initiative. In the late 19th century, political economist Henry George observed that a tax on property improvements reduces a landowner’s incentive to build, as improving the value of his or her property would increase the amount of taxes owed. Henry George hypothesized that, by eliminating the tax on improvements and implementing a relatively high LVT–which depends only on location value and surface area–landowners would be incentivized to increase residential and commercial space in order to create the necessary revenue to pay the LVT while generating desired return on investment.
Despite the proven success of the LVT in several countries around the world, Los Angeles cannot, at present, implement such a change. The California constitutional change known as Proposition 13 makes it exceedingly difficult to enact any measure of change to either land or building value taxation. Enabling such changes would require either changing or circumventing Proposition 13’s limitations.
At present, the human cost of inaction is quite severe. While a reaching an effective long-term solution requires bold measures, the humanity in us demands that we commit to positive change for all.
If you’ve considered moving to San Francisco recently, you might have abandoned the idea when you learned that median rent for a 1-bedroom apartment is an astonishing $3,500 a month, essentially requiring an income of over $100,000 for a basic standard of living in the city. Those figures are very real. San Francisco rents are out of control.
As a San Francisco resident, Eric Fischer wanted to know exactly what was driving those figures. He dug into housing data and discovered that comprehensive records on city-wide rents only go back to 1979, which is coincidentally the year that rent control became law and mere months after the passage of Proposition 13, which effectively limited both the amount of growth and rate of property taxes statewide. This information inspired Fischer to unearth and examine previous data trends and answer the question of how rent control has affected rent prices.
Fischer spent hours studying pre-1979 “for rent” ads in the San Francisco Chronicle archives, amassing sufficient data to draw conclusions about rental rates from 1956 to 1979. He released a number of informative charts in his blog post on the topic. I have included one of the more telling charts below:
The chart above shows the increase in median rents over the past 70 years. This chart is surprising for two major reasons. First, with the exception of the tech boom around the year 2000, rent prices have consistently risen 6.6% each year, which is about 2.5 percentage points above inflation. Second, rent control had no effect on year-by-year rent increases.
After tracking trends in rent prices, Fischer wanted to figure out exactly why rent prices have increased at this rate and what we might do to slow, and even reverse, this incline.
As the chart above shows, Fischer identified key variables affecting rental rates: total housing inventory, the number of jobs in San Francisco, and the total amount of money paid to every person with a job in San Francisco. Based on this information, Fischer has an idea for how we can drop the cost of housing in San Francisco by 66%. According to Fischer, “It would take a 53% increase in the housing supply (200,000 new units), or a 44% drop in CPI-adjusted salaries, or a 51% drop in employment, to cut prices by two thirds.”
Fischer’s discovery mirrors an idea from the 19th century British political economist, David Ricardo. Drawing from Adam Smith, Ricardo formalized what is known as the Law of Rent. It shows that the productivity of labor compared to the best available rent-free land determines rents. Just like in Fischer’s data, if productivity goes up, rents go up, and vice versa. By extension, real wages are determined by the best available alternative to renting. In his day, the New World was full of decent opportunities to homestead, and this gave laborers bargaining power in the labor market. You can’t force someone to sell their labor for less than what they could go out and make for themselves. Workers in the Old World of Europe didn’t have this luxury.
Extending Ricardo’s law of rent, the American political economist Henry George argued that tax policy canes on buildings penalize building, resulting in a dearth in both housing and commercial sites, and reducing the wages left over to working people. To encourage more construction, he recommended abolishing taxes on buildings, and, crucially, argued that high land value taxation would encourage landowners to put more residential and commercial space on the market in order to meet the cost of the land value tax.
Both in the United States as well as abroad, this concept of shifting taxes off buildings and onto land has proven to increase residential supply and provide a general economic boost. The barrier to this in California lies in the limits imposed by Proposition 13, the altering of which would require a voter-approved constitutional amendment. Whether the political will exists to enact such a change remains to be seen.
Considering Fischer’s findings and the reality of what’s happening in San Francisco, the situation looks particularly precarious. Heeding his conclusions could prevent similar crises in rapidly growing urban centers like Denver, Portland, and Seattle. The biggest takeaway for these cities: either build sufficient housing to accommodate a growing population or face an out-of-control rental rate crisis like the one in San Francisco.