Don’t Blame Proposition 13 for the Housing Crisis

Notwithstanding California’s leftward drift, Prop 13 remains remarkably popular. Indeed, polling suggests that if Prop 13 were on the ballot today, it would pass by about the same two-thirds margin that it did in 1978. But the enduring embrace of this landmark measure by California homeowners is a huge irritant to those who want ever more taxpayer dollars.

For 37 years, detractors have made a parlor game of criticizing Prop 13. Our favorite is blaming Prop 13 for the acquittal of O.J. Simpson. The latest salvo is that Prop 13 is to blame, at least in part, for California’s housing crisis.

A recent study by Chris Thornberg, head of Beacon Economics, reviews the depth of the crisis and attempts to identify its causes. There is a lot of compelling data in the study which amply demonstrates how severe the crisis is. He points out that 53 percent of households earning between $35,000 and $75,000 per year spend more than 30 percent of their income on rent, while nationally, only 31 percent find themselves in this predicament. For homeowners, the figure is even worse, with more than two-thirds spending more than 30 percent of their income on mortgage payments, compared to 40 percent nationwide.

While few dispute the severity of the crisis, there is disagreement about the causes.  To explain the high cost of housing, Thornberg goes to the basic economic principles of supply and demand and attributes lack of supply to two major factors. The first is the high cost of construction due to stiff regulations, high labor costs, high land costs and high fees charged by local governments.

On this score, Thornberg is spot on.

Getting permits to build anything in California (except perhaps sports stadiums) is a nightmare. Even a frustrated Governor Brown said that efforts to reform the California Environmental Protection Act (CEQA) was doing “the Lord’s work.”

However, according to Thornberg, the byzantine laws and regulations imposed by government are only half of the story. According to his analysis, the other major factor limiting housing supply is Proposition 13 because local governments are less likely to approve new housing construction because it produces less tax revenue than commercial development. There is scant evidence to support this view other than the whining of government and labor interests who desire more money.

Indeed, the entire argument that Prop 13 is at all related to the housing crisis doesn’t even survive the first level of scrutiny.  It presupposes that insufficient property tax revenue is generated for local services. But this cannot be squared with widely available and indisputable economic data. First, California is not a low property tax state as it ranks 17^th in the nation in per capita property tax collections. (It probably ranks even higher now because this ranking was based on 2014 data and California’s real estate market has recovered more robustly than almost all other states).

And it’s not as if the state relies only on property taxes.  We have the highest income rate in America as well as the highest state sales tax rate. Our overall tax burden was just ranked by the Tax Foundation as the sixth highest.  To suggest that Prop 13 somehow impedes the pursuit of rational housing policy simply doesn’t make sense. Our elected leaders do not address this crisis because they are motivated (or restrained) by political influences, not because they don’t have the money.

In any event, the development of residential properties has a significant and positive impact on a local economy which translates into tax dollars. According to data provided by the California Building Industry Association, new housing construction in California contributed more than $38.6 billion to the economy in 2013 and supported more than 209,000 jobs per year. And as it relates specifically to the tax revenues generated, a study published several years ago by the California Housing Foundation, The Housing Bottom Line: Fiscal Impact of New Home Construction on California Governments shows that after subtracting for costs to government, new housing more than pays its way. Despite claims by some Proposition 13 detractors that new home construction “costs” government, the study showed otherwise.

So, while burdensome government regulations – especially those associated with CEQA – are the reason we don’t build more housing stock, Proposition 13 doesn’t even appear in the picture. But the study’s authors shouldn’t feel bad. If they were playing baseball, a batting average of .500 is pretty darn good.

Jon Coupal is president of the Howard Jarvis  Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.