California’s infamous Prop 13 is similar to Oregon’s Measure 50. Both discourage redevelopment. Scholar Paul Fisher’s statistical model shows that a replacement land value tax will greatly boost housing supply.
The Role of Property Tax in California’s Housing Crisis
by Paul J. Fisher,
Department of Economics, University of Arizona
November 2, 2021
Excerpts:
Abstract
California faces a shortage of housing according to politicians, activists, and residents. In this paper, I leverage differential exposure to the Proposition 13 tax laws to understand the impact of this policy on the production of housing in Southern California. Proposition 13 restricts property tax growth as long as the owner doesn’t sell or redevelop the property, which allows me to exploit differences in market conditions at the time of prior purchase to identify the effect of these property tax limits on property redevelopment. I find that Proposition 13 discourages redevelopment and sales. In a dynamic discrete choice model of land use, I find that adopting a land value tax that replaces Proposition 13 based property taxes would increase housing production by 35%, generating a similar or greater amount of new housing as other policies under consideration in California.
My goal is to measure how the tax savings generated by Proposition 13 impact land use decisions. My dynamic model of land use choice incorporates property taxes to evaluate how these choices are impacted by Proposition 13’s assessment growth cap in a partial equilibrium setting. The model assumes that the choice of land use is a function of the rent obtained from each use, switching costs to redevelop the property, and the tax burden from the use.
I estimate an infinite period dynamic discrete choice model of land use. In the model, landowners choose between using land for single family homes, multiple family housing, and a non-housing option. They compare the rental profits, the property tax bill, and the costs of switching to a new use to make their decisions.
Using data from Los Angeles, I first conduct a series of reduced form regressions to measure the effect of Proposition 13 on redevelopment. I regress the probability of redevelopment on the effective tax rate which measures exposure to Proposition 13. I find that the average parcel is 60% more likely to redevelop if they have no savings from the policy, controlling for zoning, location, and existing structure’s characteristics.
The model generates estimated rental profits and redevelopment costs for housing that are consistent with data outside of the model. I then use the estimated coefficients to simulate land use choices under an alternative tax scheme, a land value tax. Land value taxes are based on the qualities of land and not the buildings upon them which eliminates distortions from property tax on land use choices. Comparing predicted choices under Proposition 13 and under a land value indicates that adopting the land value tax would increase housing production in Los Angeles by 35% during 2006-2018. This is driven by increased conversion of non-housing property to housing and increased conversions of low-density single family housing to higher density multiple family housing.
As expected, more land is used for housing under the land value tax with about twenty-five thousand more parcels used for single family housing and nine thousand more parcels used for multiple family housing. These come at expense of non-housing which records a net decline of about thirty-four thousand parcels. These shifts correspond to an increase of about seventy thousand more units of housing based on the characteristics of the parcels that adopt multiple family housing. I estimate that adopting a land value tax would increase the number of bedrooms in Los Angeles by 140 thousand, half from single family housing and half from multiple family housing. The changes in the number of housing units and the number of bedrooms reflect a two percent change in the supply of housing. The additional units would increase the number of new units constructed by about 35% in the Los Angeles Metropolitan Area.
Conclusion
In this paper, I examine the impact of the structure of California’s property taxes system on the choices of property owners. I present and estimate a model that shows that Proposition 13, California’s assessment growth cap discourages the sale and redevelopment of property. Using data from the Los Angeles MSA, I find that eliminating Proposition 13 would increase property sales and redevelopment. Los Angeles could increase its housing production by around 35%. This suggests that the structure of property taxes has a meaningful impact on the supply of new real estate development, including housing, and there is substantial room for improvement within California’s property tax system.
Comment:
If there are any doubts about the incentive effects of LVT this study should dispel them. Our own research reveals that the Oregon system of property tax hampered by M-50 assessment limitations not only discourages redevelopment, but is grossly unfair. The studies have demonstrated the incentive effects of changing to the land value tax in terms of negative tax shift on properties whose owners invest in capital improvements. Fisher’s analysis of the Los Angeles region also shows how LVT would boost redevelopment; furthermore he estimates the additions to housing supply.
Tom Gihring, Research Director,
Common Ground OR-WA
