Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

 

So there I was, mid-May in Dublin at the Foundation for Fiscal Studies’ 24th annual gathering, The Fiscal Treatment of Property, expanding on the topic Lessons from the United States and explaining US real estate taxation to a roomful of tax wonks. 

 

Class, can you say ‘locally autonomous control’?

 

[Click here to access my whole presentation, in pdf.]

 

You may not think the subject gripping, but they did, because they’re giving serious consideration to introducing annual real property taxes after thirty years without any, and they know that doing so is political dynamite.

 

Just propose raising taxes, and run

 

If you’re going to do this, I advised them, link local taxes to autonomous local control of visible local services: schools, police, firefighters.

 

Local control over real estate taxes also allows low dexterity in managing economic growth and property development, particularly via the use of targeted incentives, including:

 

PILOTs and redevelopment areas

 

1. PILOTs.  Payments-In-Lieu-Of-Taxes, where a municipality can structure any arrangement it

 

PILOTs require state-level authorization, and tend to be popular only in slow-growth already-urbanized areas with reliable high land values and a death of affordable housing, as evinced by the three states I cited (Massachusetts, New Jersey, and New York).  In lower-value states where other revenue sources are hard to come by and even the local real estate taxes are seen as expensive and hence a political risk, the tax man tends to be more aggressive with the assessments and the city council tends to be stingy with the abatements.

 

Even 121A couldn’t save the Jamaica Plain shoe factory

 

Originally these state enabling statutes were aimed at protecting industrial real estate, such as Massachusetts’ hopeless quest to keep the shoemaking business, but after those industries all collapsed in the Fifties, killed by the air conditioner which enabled them to transplant to the Southeast and Southwest, the late-Sixties saw them reused for affordable housing, which is today the dominant claimant for PILOTs.

 

2.  Redevelopment Areas (RDAs).  Another local-option initiative targeted to high-growth, high-density, high-value markets.  In an RDA, the locality draws a boundary around a core area, usually the central business district or an expanded downtown.  Expecting growth within the designated area, the locality seeks to assure that the rising real estate values do not totally price out affordable housing.

 

RDA map

Land value being a residual, these localities know they cannot stop prices from rising, so instead they take a portion (10% to 25% is common) of the increased real estate tax revenues derived from rising values within the RDA, and siphon that into a reserved ‘Housing Set-Aside Fund’.  HSAF proceeds are typically accumulated and lent out as soft debt to fund increased affordable housing.

 

Linkage, incentives, and Community Preservation

 

In addition to those two direct manipulations of the amounts or uses of real estate taxes, I highlighted three other American taxation/ land use initiatives, all of them locally generated and locally controlled. 

 

3. Linkage.  Linkage, as it has come to be named, has a more controversial reputation because of its targeting.  Within a designated area – again, usually a high-value zoning-constrained high-demand section of the city, usually the central business district – the city requires any up-zoning proposal to provide new affordable housing ‘linked’ to the new development in a stipulated ratio: so many square feet of new affordable housing for each hundred square feet of increased density approved.

 

Linkage’s structure flows from impeccable economic logic.  Most downtown developments are non-housing uses – retail, hotel, office – which generate jobs.  Good, but with those jobs come people, and the people either need housing locally or add to the traffic burden.  Either way, unless affordable housing is advantaged somehow, the non-housing uses will increase, exacerbating exclusion and traffic congestion – unless, that is, affordable housing is ‘linked’ to each incremental non-housing development, to keep the uses mix in balance.

 

Linkage comes in many forms.  Some are formulaic: X square feet of new affordable for Y square feet of non-housing.  Some are custom-negotiated, like the UK’s Section 106, whose design flaws I’ve already chronicled (at length). Some, like the Union Army during the Civil War, allow substitution – instead of delivering value in kind, the developer can simply pay a surcharge of $Z per square foot of increased zoning. 

 

How many of them were bought substitutes?

 

It’s this last that gives linkage its poor reputation in some quarters, as it smacks of the papal indulgence, or a bald toll to purchase approved up-zoning (instead of having each upzoning request considered on its own merits as being good or bad for the city’s development).  Further, unlike RDAs, linkage is zero-sum; every dollar of affordability delivered (either directly via affordable square feet or indirectly through linkage transfer payments) is one dollar less of land value.  Done clumsily, or to excess, it looks less like urban planning policy and more like a gotcha tax (whose motto is the Latin for, “because we can”).

 

I make the rules

 

Linkage is the flip side of PILOTs – taxing some properties higher or lower based on their perceived contribution to or deduction from the city’s overall use-of-property balance.

 

Too much reliance on one thing?

 

4. First-time homebuyer incentives.  Like linkage, homebuyer tax-credit incentives (like the Washington DC homeownership tax credit) are a one-time rather than an ongoing payment, and perhaps could have been excluded from my talk, but I included them as further illustration of how the community, if given local autonomy over zoning and real estate taxation, can customize extensively.

 

5. Community Preservation Acts.  I’m on record (four years ago! how blogging time flies) as endorsing the Community Preservation Act as a case study in good incentives, although in the intervening four years I’ve cooled somewhat after posting about localities, who saw the money just sitting there, snitching it for just-any-other purpose:

 

Such a problem is illustrated, unfortunately, by the expenditure creativity being displayed by various cities and towns around Massachusetts as they transmogrify the original legislative purpose of the Community Preservation Act’s money into … well, whatever they can think of. As revealed by yet another insightful policy article from MassInc’s, free CommonWealth magazine:

 

Moving the goal posts

 

Designed to create open space and affordable housing, the CPA is now being used to pay for sidewalks and artificial turf

 

If I write the rules, there’s no rule against it, right?

 

Where the ring-fencing breaks down, the CPA is just another surtax – and worse, because it flows via state match to localities that voted the override, it turns out to be reverse redistributive, giving  more to richer communities and less to poorer ones.

 

Finally, I devoted only a fleeting commentary to the implications of a real estate downturn on local finances:

 

Subprime’s consequences

 

All strung und drang aside, US foreclosures are concentrated in five states that can be divided into three conceptual categories:

 

1. Weak long-term economy (Michigan) dragging down values.

2. Speculative overbuilding run amok (Arizona, Florida, Nevada) because of low barriers to entry.

3. A whipsaw of overbuilding and skidding economy (the one and only California).

 

In light of all that, how do the US and Ireland compare?

 

Through the looking-glass: two ways of taxing

 

Ireland’s taxation is predicated on building and reselling of housing.  When times are good for the property market, government is awash in cash.  When times are bad, the cash dries up completely.  That’s probably contra-indicated because it’s in bad times that government is called upon to do more, and in good times it probably should do less. 

 

In short, I told my hosts, from what I could see of the US, and what little I understood about Ireland, a move to a recurring real estate tax on residential property would be wise – and the only way to do it without committing political suicide would be to connect it directly to increased local autonomy over visible local services. 

 

When the institute issues its report, I’ll let you know what they recommend.

 

Somewhere, over the rainbow, taxes work

 

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