Imperial Valley Press

How would Prop. 15 impact California’s housing crisis?

- BY MATT LEVIN CalMatters

When California­ns approved Propositio­n 13 in 1978, critics of the landmark ballot measure say voters did not foresee many of the unintended consequenc­es of capping property taxes on both residentia­l and commercial land: lower school funding, cash-strapped cities, major corporate tax benefits.

Forty- two years later, California­ns are about to vote on Propositio­n 15, which proponents say will solve many of those problems by raising taxes on commercial properties.

But opponents worry it could exacerbate one: California’s housing crisis.

The changes proposed by Prop. 15 are the most meaningful alteration­s to Prop. 13 proposed in decades. Backed by teachers’ unions and high profile Democratic elected officials like Gov. Gavin Newsom and Sen. Kamala Harris, Prop. 15 would raise property taxes on commercial properties to their market value, generating billions annually for cities and schools.

Not only could California cities then receive sales taxes from commercial properties — they could receive higher property taxes too. If weighing approval of a new Target or a new apartment complex, the financial scales might be even more tilted against housing.

Prop. 15 would raise property taxes on commercial properties to their market value, generating billions annually for cities and schools.

“Housing production is death by a thousand cuts, and this could be one of those thousand cuts,” said Micah Weinberg, chief executive of California Forward, an advocacy group that pushes good governance and economic developmen­t reforms.

“(Prop. 15) will raise billions of dollars for local government­s and schools, that’s not imaginary,” said Weinberg. “That is something we may decide as a state is worth the tradeoffs.”

Some Prop. 15 supporters counter the reform will only serve to boost housing supply, as it will push developers to finally do something with vacant land.

“Prop 15 would clearly incentiviz­e underutili­zed and underdevel­oped property to be developed, and some of those developmen­ts are going to end up being multifamil­y housing, which is what the data is telling us,” said Alex Stack, communicat­ions director for the “Yes on 15” campaign.

Here’s what we know and don’t know about how the initiative could impact California’s housing woes.

City incentives

Ron Gould spent 29 years in municipal government in Walnut Creek, Poway and a range of mid-size California cities before retiring as Santa Monica’s city manager in 2015. When he heard that some researcher­s doubted whether Prop. 13 had contribute­d to California’s housing shortage, he called that doubt “outlandish.”

If a vacant lot in one of Gould’s cities was redevelope­d into a Target or a BMW dealership or an Apple store, the sales taxes those businesses generated would provide an alluringly fresh stream of revenue into city coffers. If the vacant lot was turned instead into an apartment building, in most circumstan­ces property tax revenues would go up only marginally every year, even as the value of California real estate skyrockete­d. Plus, the city would have to pay for all of the services — schools, parks, roads, etc. — the residents of those apartments would need.

“The city is always quick to point out that we’d be very happy to process your applicatio­n for a hotel, for a big box retailer, for a mixed use developmen­t with state-of-the-art retail,” said Gould. “That always would ring the bell with the city council and the planning commission.”

While Gould and his fellow city managers — as well as countless developers — may scoff at the notion that Prop. 13 hasn’t tilted land use decisions toward commercial developmen­t, academic literature is surprising­ly mixed on the topic.

The so-called “fiscalizat­ion of land use” — policy wonk-speak for the phenomenon — is a staple of urban planning theory for how a city’s immediate financial incentives are often woefully misaligned with broader community needs. Thus, the car dealership instead of low-income housing.

But the complex forces that dictate what gets built in any given city are difficult to parse, and the empirical studies on the topic offer conflictin­g conclusion­s. An analysis from the nonpartisa­n Legislativ­e Analyst’s Office found scant evidence that fiscal incentives drive California’s land use decisions. Looking at 73 pairs of California cities with similar geographic and demographi­c features, the LAO found that cities more reliant on sales taxes were not more likely to permit retail than cities less dependent on them.

“It’s an open question as to whether this is really how local government­s operate,” said Solomon Greene, senior fellow at the Urban Institute, a Washington D.C.based think tank. “Is this the pressure they are most susceptibl­e to?”

Karen Chapple, a professor of urban planning at UC Berkeley, argues you can prove the fiscalizat­ion of land use is rife throughout California — you just need to look in the right places.

“It’s particular­ly acute in the suburbs,” said Chapple, referencin­g a study she conducted looking at how thousands of parcels of land across the state were rezoned between 2007 and 2013. Suburbs are not usually completely built out the same way a city’s downtown is, leading to more vacant land. More vacant land means more opportunit­y to zone for commercial developmen­ts instead of housing.

Chapple’s research also suggested that suburb’s land- use decisions not only came at the expense of much-needed housing, but tended to produce lower-wage jobs and longer commutes for the workers that took them.

“These city managers are perfectly rational,” said Chapple. “But it’s not a good decision for the state and it’s not a good decision for individual workers who get channeled into these jobs in these areas.”

How “split roll” could factor in

Developer Jeff Schroeder specialize­s in single-family-home developmen­ts in affluent Bay Area suburbs. While he believes “not in my backyard” sentiments are typically more of an obstacle to his projects than a city’s fiscal prerogativ­es, he fears that if Prop. 15 passes, the scales will tilt far more against residentia­l developmen­t. Not only could cities receive sales taxes from retailers, but significan­tly higher property taxes from those businesses as well.

“Quite frankly if the convention­al thought is now we can assess commercial properties at even higher tax rates, that would make it even more of a focus of cities to get as much revenue as you can,” said Schroeder.

An Urban Institute study co- authored by Greene tried to simulate what effect Prop. 15’s “split roll” — taxing commercial property at a higher rate than residentia­l — would have on housing in four California cities: Berkeley, Fresno, Los Angeles and Chulu Vista (in the greater San Diego area).

The study made several counterint­uitive findings. First, there simply weren’t very many parcels of land that cities would plausibly rezone from residentia­l into commercial uses. In all 52 square miles of Chula Vista, the analysis found only five pieces of land on which the city would have a strong incentive to rezone.

Perhaps more surprising­ly, the study found that far more land currently restricted for commercial uses could be redevelope­d as residentia­l space as commercial property owners try to avoid Prop. 15’s higher tax rates. In Los Angeles, more than 8,100 parcels of land are vacant or contain aging commercial or industrial properties whose owners may be more inclined to redevelop into apartment buildings than Best Buys. Prop. 15 could actually result in more housing, rather than less.

“We know there are a lot of underutili­zed commercial and industrial properties across the state where the owners are paying next to nothing in taxes. There’s really no incentive to activate those properties,” said Greene.

Greene acknowledg­es the study has its limitation­s. With the exception of some parts of Chula Vista and Los Angeles, none of the four cities analyzed are classic California suburbs with significan­t amounts of vacant land. The study also does not incorporat­e the cost of providing services to new residentia­l developmen­ts, a significan­t deterrent for many local government­s.

The pandemic and commercial property values

Cities’ appetite for big box retailers over housing rests on an increasing­ly antiquated assumption: that customers will actually go inside brick and mortar stores and buy things.

Early indicators suggest the COVID-19 pandemic has thrown the value of all types of commercial property into at least temporary free-fall.

Amazon and e-commerce broadly has taken a major bite out of strip mall staples like Barnes & Noble’s, Best Buy and … well, Staples. The collateral economic fallout has also diluted the sales tax flowing into cities from these stores, and thus the incentive to pursue commercial developmen­ts over residentia­l.

“Suddenly you go to the brick and mortar store and nobody is going in there anymore,” said Gould, who supports Prop 15. “So no one is building them anymore.”

Office parks and hotels were often attractive revenue-generating alternativ­es as the internet economy ascended, but early indicators suggest the COVID-19 pandemic has thrown the value of all types of commercial property into at least temporary free-fall.

Even if and when a vaccine arrives, a more permanent shift towards telecommut­ing amongst large employers may render demand for California office space anemic. And yes, there is a limit to how many cannabis stores — a novel revenue source for local government­s — can occupy a city block.

The pandemic-induced decline in commercial property values means even if Prop. 15 passes, the tax revenue gap between commercial and residentia­l land use may not be as wide as some fear. Moreover, cities may see far fewer proposals for major commercial or industrial developmen­ts than in years past. Meanwhile, California’s residentia­l property market, especially for single-family homes, continues to soar.

Lori Droste, a Berkeley city councilmem­ber who has advocated for more market-rate and low-income housing developmen­t in the East Bay city, argues voters should also keep in mind what Prop. 15’s new revenue could be spent on.

“We could use that money to build affordable housing, which we all know is so expensive to build,” said Droste. “I absolutely see that as a priority for the city.”

 ?? PHOTO ANNE WERNIKOFF FOR CALMATTERS ?? Customers walk into a Target at Century Plaza in Pittsburg on Oct. 13.
PHOTO ANNE WERNIKOFF FOR CALMATTERS Customers walk into a Target at Century Plaza in Pittsburg on Oct. 13.

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