Is new property transfer tax plan a blank check?

By Christopher Escher
December 18, 2019

On December 10, the SJ City Council approved a directional plan which aims to allocate to affordable housing monies raised from a proposed new property transfer tax.  The plan has no guarantees that the monies will actually be spent on housing and has no guardrails to make sure the money isn’t misspent on overpriced new dwellings. Pierluigi Oliverio of the Silicon Valley Taxpayers’ Association explains.

Opportunity Now (ON): In 2016, Los Angeles residents passed a similar, $1.2bn tax for affordable housing. They are now concerned that the money appears to have been misspent, with tax funds being allocated to “affordable” units that cost more than $500k to build (https://reason.com/video/los-angeles-is-spending-over-1-billion-to-house-the-homeless-its-failing/).  Are there are any constraints or metrics in this plan that would provide some type of cost limit or targets to stop something like that from happening in San Jose?

Pierluigi Oliverio (PLO): No. The spending plan passed at City Council is focused on income levels they want to target and administrative costs. Remember, the city doesn’t build the housing. They give the monies to affordable housing developers, who have to patch together funding from government subsidies, tax credits, etc.

And the reality of new construction , land, labor (these projects are 100% union),  and entitlement costs make these projects very expensive. The way the monies are currently spent acts as a subsidy not just for low income renters, but also for the current housing construction industry. The city’s plan will do nothing to incent cheaper building costs and will not influence the current marketplace to bring real prices down.

ON: So if the per unit cost of “affordable” housing these tax monies end up going to are north of $500k, there’s nothing in the plan to stop that?

PLO: Nothing.

ON: Could they have put those types of cost controls in the plan?

PLO: Yes.  It’s possible to put language into the plan and the initiative itself  to say units can only cost this much, square footage should be limited to a certain metric, a certain percent have to be shared facilities or a certain type of less expensive construction. This is the sort of activity that would influence the marketplace, as well as controlling costs. Although if you put a cost limit, say, of $450k/unit into the ballot initiative, you might shock the populace into voting “no” because many people would consider that per unit cost extravagant.

ON: Does last night’s vote do anything to actually require that the property transfer tax money will go to housing? Our previous interview with Pat Wait of Citizens for Fiscal Responsibility (https://www.opportunitynowsv.org/blog/problem-wit-unrestricted-taxes) suggests that because it’s a General Fund tax, the council can spend it on anything they want.

PLO: Nothing has changed.  It remains a General Fund tax, which means there’s a lower bar for passing it—it only requires 50% approval—and future councils can spend the tax receipts on anything they like. Last night’s plan is directional and aspirational, but it’s just a statement of goals at this particular moment in time. There is no legal requirement for them to spend the monies the way they say they want to. It may require an extra public hearing or two to make the change, but that happens all the time.  The Oversight Committee is a misnomer: it has no teeth, they can’t veto a change or require the council to abide by its stated intentions.

And even if they do end up spending some, or even all, of this money on affordable housing, it’s a losing battle. They will never be able to raise enough money to put a dent in the problem.  The solution has to be to dramatically lower the cost of building new housing, which means changing land use regulations,  labor costs, CEQA, and the factors that drive up the price of new housing.

ON: So this money that’s supposed to go to housing could actually be spent on employee pensions?

PLO: Usually, money spent on affordable housing come from restricted funds, not general funds.  So here’s the problem they are likely to face: As pension costs rise, the ability to maintain this verbal promise of how the money will be spent will come under pressure. The City is legally required to fulfill its pension obligations, it’s not legally required to spend this money on housing.  So they will be in a bind:  Are they going to tell the people of San Jose that, because pension costs have increased, we have to lay off police officers to fund expensive low income housing? I bet most people won’t think that is acceptable. The last general tax increase in 2016 was a sales tax increase and in that first fiscal year it raised $30 million. However in the same fiscal year pension costs went up $38 million, surpassing the general tax new revenue.

ON: Back in 2018, didn’t the voters reject a tax proposal to raise money for affordable housing? It was a targeted tax proposal.

PLO: That proposal was for a targeted tax, which means it needed 2/3 approval to pass. It didn’t get 2/3ds.

ON: So this time, they are offering a General Tax focused on the same thing. What’s the difference?

PLO: A General Tax only requires 50% approval.

ON: But they are saying this is targeted for affordable housing.

PLO: There is nothing in this ballot proposal that would ensure the monies will go for affordable housing. The proposal is for a General Fund tax.

ON:  Wait, so they are promoting this tax that’s targeted on housing (which requires 2/3ds approval), but in reality it’s a General Fund tax (which only requires 50% approval), which they can spend on anything.  Did someone just move the goalpoasts? This seems kind of cynical and deceptive.

PLO: Governments want to raise revenue.

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This article was originally published on Opportunity Now’s website here.

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