Manville and Monkkonen on unwanted housing
A rationale for monetary compensation
Unwanted Housing: Localism and Politics of Housing Development. Michael Manville and Paavo Monkkonen, 2021.
“Mitigation”
It’s not just municipal governments in Metro Vancouver that tax new housing like it’s a pot of gold. Manville and Monkkonen open with a couple of eye-opening stories from California.
In 2018, a developer broke ground on a 249-unit [seven-storey] apartment building in downtown Santa Monica, CA. The project would rise on a vacant piece of land across from a rail station, on the site of a former Fred Segal department store. A strong case could be made, at this time, that Santa Monica needed more housing. The city’s housing stock had barely grown since 2010 and Santa Monica had twice as many jobs as housing units. The median home value was $1.2 million, and median rent $1,800. Nevertheless, permission to build did not come easily. The developer had proposed the project in 2013. In the following years, the city held multiple hearings, and the developer had to complete a 750-page Environmental Impact Report (EIR). The city approved the project only after both sides signed a 167-page development agreement, which laid out the terms under which the housing could be built.
Those terms included the following: in exchange for the right to build, the developers would pay $240,000 to the city’s bus system, $900,000 to its water infrastructure fund, $1.1 million to its early childhood development programs, $1.6 million into its transportation fund, and $1.7 million into its parks and recreation fund. They would make additional payments to the city’s historic preservation programs. The developers would limit the number of peak period vehicle trips from the building, and pay the city a fee for every trip exceeding those limits. The building would be LEED platinum. The developer would favor local residents in all hiring decisions during construction. The property would include a community meeting space open to all city residents, and provide more parking spaces than zoning would normally demand. Perhaps most dramatically, the developer would acquire and entitle an entirely separate parcel of land, at a cost of about $40 million, and donate that land to an affordable housing developer, who would use it to build sixty-four units of subsidized housing. Thus just one cost of developing a piece of land in downtown Santa Monica was buying, entitling, and giving away another piece of land. All the conditions above fell under the broad category known as “mitigation.”
This example is admittedly extreme. But it is not unique. In 2015, a developer proposed a 300-unit apartment building near a rail station in downtown Berkeley, CA. The city’s conditions for approval included the following. The developer would pay $1 million into Berkeley’s arts programs, $10 million into its affordable housing programs, and an estimated $15 to $20 million to reconstruct and operate a financially troubled movie theater on the site (Raguso 2020). In 2020 the developers abandoned the project, saying they could not function as a “never ending piggy bank” for the city. By the time the project died, its administrative record ran to over 10,000 pages. Berkeley’s median home value was $862,000, its median rent was over $1,500, and—like Santa Monica— it had nearly twice as many jobs as housing units.
New housing as a Locally Unwanted Land Use
What’s the rationale underlying these demands?
These anecdotes highlight a phenomenon that often swims beneath planning’s surface: in many parts of the United States, new housing has become a locally unwanted land use, or LULU. The planning process treats housing, which at least in the abstract is a source of opportunity, as a source of trouble instead. New housing is not considered a benefit in itself, but a burden for which existing residents deserve compensation and developers must make amends. Neighbors often worry that new housing will exacerbate congestion, undermine affordability, erase community character, and erode open space. They push these concerns into the planning process, and planners and elected officials respond, either by restricting development or allowing it only after multiple mitigations.
There’s strong incentives for municipal governments to tax new housing in this way. They have to deal with major social problems at the local level, and they have limited sources of revenue. The most economically efficient local tax, taxing land value, is highly unpopular with property owners.
Local power in the United States is highly constrained, and this constraint creates a troublesome tension in American federalism: a scalar mismatch between means and motivation. Social problems are often most visible and acute locally, which gives local officials bigger political and perhaps moral incentives to address them. The 2018 poverty rate in Cleveland, for example, was three times that of the country, meaning that officials in Cleveland are more likely than national officials to regularly confront poverty, and more likely to have constituents who prioritize addressing it.
But local officials often have the least fiscal ability to confront these problems, because it is difficult for local governments to levy progressive taxes. This difficulty arises in part from voter-driven state preemption: over forty states have passed laws that limit local taxation. Even without such laws, however, the local ability to tax and spend would be limited, because most local taxes are easily escaped. Labor and capital can cross local borders without losing access to important markets. The tax-averse firm or person who is reluctant to leave California has less qualms about moving from Los Angeles to Beverly Hills. Steeply progressive tax rates, as a consequence, might repel investment rather than raise revenue.
Crucially, not all local taxes suffer from this problem. Taxing land value does not. Land is immobile and fixed in supply, so taxes on it are both unavoidable and unencumbered by excess burden. These attributes, from an economic perspective, make land taxation an ideal source of public revenue. But taxing land is politically difficult. It imposes high costs on the incumbent property owners most likely to vote in local elections. These political hurdles are one reason that broad-based, continuous land value capture is rare.
So new development is an opportunity for municipal governments to raise funds, even if it means higher prices and rents for homebuyers and renters.
It is politically acceptable, however, to capture land value when property is developed, as the burden of value capture in that instance is much less likely to land on incumbents and more likely to fall on outsiders. Capturing value in this way, through building permit applications rather than tax bills, requires extensive land use authority. Local land use authority, as it happens, has expanded over time, even as local taxing authority has diminished. This expansion arose in part as a backlash against political structures tilted toward developers in the 1960s, and in part as a result of Great Society programs that empowered communities and neighborhoods.
The upshot is that when developers request building permits, they open a rare door for cities to act on a wide array of problems. Cities thus have good reasons to emphasize parcels: the parcel is the place of physical change, the focus of residents’ concern, and the politically acceptable lever of municipal power.
Capturing value at the point of development, however, changes the way localities approach problems. Perhaps most obvious is that it implicitly curbs municipal ambition: taxing development generates fewer resources than taxing land, because the revenue base is so much smaller: there is always far less land being developed than land that exists.
The impact of blocking new housing is worst for the poor
Manville and Mankkonen explain that a local veto on housing is worst for poor neighbourhoods.
Development restrictions mechanically favor the wealthy. Consider two communities in a region with high housing demand: a wealthy place, full of homeowners, that fights new development because it might bring in lower income people, and a lower income place, full of renters and worried about gentrification, that fights new development because it might bring in higher income people. Both places, by localist logic, should be entitled to block development.
Blocking development is more useful to the rich place than the poor one. Blocking development keeps prices high. High prices help the rich community. High prices inflate the residents’ wealth (remember, they own their homes) and give them the community they want (one that keeps lower income people out). For an affluent owner-occupied neighborhood, blocking development advances both the interest of the community and the interest of the individuals who comprise it.
The same is not true for the poorer community. High prices harm, not help, renters. In a renter community, the preference of each individual is to keep prices low. Blocking development cannot do that. Even if it could, the low prices would satisfy individual preferences but not satisfy the community preference, because low prices cannot, by definition, keep rich people out. High prices are an obstacle for low-income people, but low prices pose no problem for high-income people. High-income people, in fact, pose a problem for low prices, because high-income people can bid low prices up. A wall of high prices around the affluent community will perpetuate itself, but a wall of low prices around the low-income community may be short lived.
Or as Matthew Yglesias puts it:
Guy who’s worried that if we ban new luxury housing there will be skyrocketing levels of homelessness among the rich, since the only dwellings left will be cheap affordable housing.
More
7-story building approved at former Fred Segal site. Matthew Hall, Santa Monica Press, May 2016.
A look through “The Park” in Downtown Santa Monica. Steven Sharp, Urbanize Los Angeles, April 2022.
Previous posts: housing is a ladder, gentrification, Community Amenity Contributions