The speculative driven high cost of land in Santa Monica makes that city a prime candidate for a land value tax test case.
Inside/Outside – Housing and Land Value in Santa Monica
Mike Feinstein
January 4, 2021
In much of California, one of the biggest barriers to needed housing production is the high cost of land. Part of the price of land comes from speculation about its future value. Part of this incentive to speculate – which drives prices up – is the ability by property owners to privatize the publicly created value of land.
A large-scale local example was the creation of the I-10 freeway into Santa Monica (in the 1960s), which made it easier to live in Santa Monica and work elsewhere. This caused land values to skyrocket — and ultimately led to local rent control being passed by initiative in 1979, as a response to rapidly increasing apartment rents.
When land values increase, it becomes more expensive to achieve public policy goals that require land — like new parks, schools, and affordable housing. But under our U.S. economic system, property taxes are the same, whether the majority of increased land values result from public investment (like a new park across the street) or private investment (like adding an extra bedroom on one’s property.)
As a result, much of the increased value from public investment is privatized into the hands of a small number of property owners, leaving less money in public coffers; while public policy objectives become more expensive at the same time because of higher land prices. This also contorts public policy via the fiscalization of land use, which favors tax-generating commercial uses over needed housing.
Land Value Tax
A public policy tool to address this is a Land Value Tax (LVT). Under an LVT, the property tax is split so that the tax on the land is higher (capturing publicly-created land value), and it is lowered on improvements made by the property owner (which more fully rewards private investment.)
An LVT — also called Community Ground Rent — diminishes the privatization of publicly-created land value. This reduces the upward speculative dynamic on the price of land, making land for new housing more affordable. It also creates a public funding source to enable cities to subsidize new housing affordability required by their state mandated Regional Housing Needs Assessment (RHNA) numbers; as well as to establish public Land Trusts to keep land and housing in long-term affordability.
Santa Monica freeway redux
Had an LVT been in place when the I-10 freeway was built, a greater percentage of the resultant land value increase could have been used to purchase and deed restrict existing affordable housing, and create new affordable housing. Rent control would have then been a complementary tool (to respond to the housing gentrification caused by the new freeway) instead of a primary tool, as rental costs would not have gone up as high and there would have been more publicly-created ’social housing’ (as it is often called in Europe.) When local rent control was weakened by vacancy decontrol via the 1995 Costa-Hawkins Act, the damage proportionally would have not been as great.
An LVT also could have a been a source of reparations for displaced residents of the Pico Neighborhood which was divided in the middle by the I-10 freeway.
Santa Monica faces another major land value increase caused by public policy changes when Santa Monica Airport (SMO) becomes a Great Park after 2028. Land values in Sunset Park will spiral upwards, and this will also negatively affect affordability in the Pico Neighborhood. Without an LVT in place to depress this speculation and capture a greater part of the increased value for public use, Santa Monica will become a victim of the gentrification caused by the very needed Great Park.
By contrast, an LVT in place could also become a partial funding source for capping the I-10 freeway, as called for in the City’s Open Space Element. When parts of the I-10 freeway are capped and new parkland is put on top, the further increase in land value would be captured by the LVT and recycled back into the community. Capping the freeway (say between 11th St and 17th St) also creates extensive opportunities for new affordable housing above what are now the planted freeway embankments. That land can handle the weight of new housing and should be zoned for as such in future City planning.
Franz Kafka
Sadly, the lack of sufficient public funds for affordable housing — combined with the high cost of land — means cities have to accept larger than wanted market-rate projects, in order to get paltry amounts of inclusionary affordable housing. But because legally, local zoning has to allow these projects…to be financially viable, there usually isn’t room to require a great deal of inclusionary housing, because there isn’t much money to be made from it. The result is a Kafka-esque public policy debate, where if we require ‘too much’ inclusionary housing, no housing will be built; and if we require too little, all we get is mostly market-rate, which is outside the reach of affordability for most people. There are also nexus studies that show when you build market rate housing, you create a demand for low income workers who themselves need affordable housing, which can’t be provided locally, which leads to longer commutes, leading to increased CO2 emissions and climate change, which argues for more density instead of sprawl — all which returns to how the privatized value of high-cost land makes local housing production so difficult.
Santa Monica makes sense as a LVT test area – because of the self-induced gentrification in land values value resulting from major public policy choices like the I-10 freeway, Expo Light Rail Line, and the impending Great Park; combined with the financial difficulty of providing the affordable housing mandated by Santa Monica’s recent RHNA numbers, without a new source of public funds. Another test area could be along the Los Angeles River, where public investment also threatens to gentrify and undermine affordability in nearby communities.
For all of these reasons, the City Council should ask City Staff to explore the idea of Land Value Tax — and be in consultation with our State Senator Ben Allen and State Assembly member Richard Bloom, for policies in support of it.
Michael Feinstein is a former Santa Monica Mayor (2000-2002) and City Councilmember (1996-2004). He can be reached via Twitter @mikefeinstein.
Comment:
Indeed, Santa Monica has all the right circumstances for establishing an LVT pilot program. Until recently Pennsylvania had been the only state in the U.S. authorizing a split-rate land value tax. California would not be the first to follow, but could lead the West Coast campaign to induce legislators to adopt the land tax.
In 2020 the Virginia legislature authorized four cities including to adopt a split-rate property tax, imposing a higher tax on land values. Richmond is now showing active interest in adopting LVT.
In New York State real property is divided into four land use classes and taxed at different rates. A bill signed into law in 2008 created a small pilot program to test the viability of a Fifth Class in Manhattan containing only vacant and blighted parcels. These would be taxed at a rate of 3.5% on the market value of the land.
In 2009 and 2013, Connecticut governor signed a bill that allows for a pilot program for up to three municipalities to implement a two-rate property tax. New Haven is showing interest.
