Should cities only allow new housing on the condition that the developers of that housing deliver public benefits in return? This idea is often called “value capture”, and is used to justify — among other things — various forms of inclusionary zoning. I argue in this essay that value capture is conceptually and logically flawed. It rests on the idea that new housing is not by itself a public benefit, and on the assumption that not building housing is socially harmless. Most of all, it inverts one of the most important insights in urban economics and urban public finance: that value rests primarily in land, and that development is an important way to share and redistribute land value. Value capture mechanisms that are triggered by development tacitly punish landowners who share land value, and tacitly reward owners who withhold it. The fair and efficient approach to value capture involves taxing land, not development, and encouraging rather than discouraging the production of new homes. Contemporary value capture, in contrast, provides a veneer of redistribution but serves primarily to protect most urban wealth from redistribution.
City councils are on the front lines of California’s housing crisis. But local lawmakers who understand that California needs to accommodate a lot more housing are stuck in a political bind. Wherever they might put new housing, neighborhood groups spring up and oppose it. The same groups will have money to spend or voters to turn out at the next election. What’s a well-meaning city councilperson to do? Our answer: California’s “housing element” process provides a way forward. California requires cities to periodically adopt a state-approved plan, called a housing element, which accommodates the city’s share of regional housing need. These plans are reviewed and certified for compliance by the state Department of Housing and Community Development (HCD). Cities across the state will adopt new housing elements between 2020 and 2022, guiding development for the next eight years. This process hasn’t always worked well in the past, but the legislature and HCD have recently strengthened the framework. There are now substantial political advantages for city officials to pursue pro-housing policies through their housing element, rather than through the normal municipal lawmaking channels.
Municipal revenues have been hit hard by the COVID-19-driven economic slowdown, forcing governments to identify new sources of funding or enact steep service cuts. Cuts of approximately $1 billion for Los Angeles County and up to $600 million for the city of Los Angeles are anticipated, with further reductions possible as the economic fallout comes into sharper focus. Even prior to the COVID-19 pandemic, California local governments have been restricted in their options for raising revenue. This has led to an overreliance on regressive sales taxes and an inequitable distribution of property tax burden, among other challenges. Reforms to the real estate transfer tax, which is assessed when properties are sold or otherwise change ownership, are an effective and equitable solution to immediate budget needs, while also supporting important long-term priorities including affordable housing and tenant assistance.
This report evaluates California’s official housing target for the San Francisco Bay Area. While the Bay Area received a substantially larger target for the upcoming planning cycle than it had in the previous cycle, the relative increase in the Bay Area target was a lot smaller than that for the state’s other major metropolitan region, Los Angeles, which forms part of the Southern California Association of Governments. We argue that the Bay Area’s lower target reflects, in part, the state’s failure to account for the fact that the Bay Area leads the nation in supercommuters, many of whom work in the Bay Area but have been driven by the region’s housing shortage to live outside of it. State law requires an adjustment for regional “jobs-housing imbalance,” yet none was made. The Bay Area target was also deflated by the Association of Bay Area Governments’ choice of “comparator regions,” a choice which presupposed that the Bay Area should be benchmarked against similarly housing-supply-constrained regions; and by the state’s decision not to fully account for the needs of presently cost-burdened households. Altogether, we estimate that the announced target of 441,000 new housing units was at least 245,000 units short of the mark.