Maybe Metropolis: The Impact of Housing Scarcity, Not Housing Development, is the Problem
By Josh Feit
Excerpts:
Urban environmentalists—that is, pro-housing groups and transit advocates—have been correctly pointing out a serious shortcoming of environmental impact statements: Environmental review has been commandeered by slow-growthers and anti-housing groups to thwart green transit projects and even modest density, such as backyard cottages.
Can we please look at the bigger picture? Adding density not only translates into a better return on infrastructure investments, such as new transit, by improving efficiency and adding riders, but it also reins in sprawl and its accompanying high-carbon commutes. Framing new housing along these lines makes one wonder why we don’t do environmental benefits statements for new development.
Unfortunately, as Erica reported on Monday, the city council is preparing to weaponize the notion of impacts yet again, amending the city’s comprehensive plan to queue up new impact fees on development. Proponents of impact fees say they would fund the new transportation infrastructure needed to accommodate new housing. Developers—who you might think were manufacturing opioids, not new housing stock, given the blanket animosity they inspire—already pay sales taxes, real estate excise taxes, and Mandatory Affordable Housing fees. In fact, Pedersen’s proposal could cost developers up to four times as much as the annual property taxes on new development, according to a potential fee schedule introduced at a recent council hearing on the comprehensive plan amendment.
Instead of prescribing impact fees on new housing, the council should tax the impact of non-development by authorizing a fee on property owners who live in the vast tracts of our city, 75 percent of Seattle’s developable land, where prohibitive zoning forbids apartments. The city’s current development ban has put inflationary pressure on housing, fueling the affordable housing crisis and creating a disproportionate impact on renters and potential first-time buyers. Meanwhile, homeowner wealth grows. Between 2012 and 2022, the median cost of a house in Seattle rose from $420,000 to $1 million. During the same period, according to data from Zillow, median rents in Seattle rose from around $1,250 in 2012 to $2,350 in 2022.
Critics of new development like to point out that brand-new housing is never affordable to low- and middle-income people. But they seem to miss the fact that the developments they’re criticizing are being built now, under Seattle’s current zoning regulations—not in the up-zoned dystopia that exists in their minds. In other words: It’s the current rules against more density that are raising the price of housing, not some
The pro-housing advocacy group Sightline sent a letter to Mayor Bruce Harrell and the council last week that warned about the regressive effects of existing impact fees in Oregon, where they’re called System Development Charges. Noting that scarce housing markets are likely to make impact fees “fall on renters and new homebuyers,” Sightline cited research that concluded: “Homebuyers and renters in tight housing markets likely bear a greater share of SDC costs than landowners.”
The Oregon data also concluded that fees kill development (rather than raising any money from it). Sightline’s cautionary letter to Mayor Harrell and the council goes on to argue that impact fees put a disproportionate burden on affordable housing. In Oregon, they wrote, “smaller entry-level homes, lower-cost middle housing and apartments, and communities with weaker markets are disproportionately affected by SDCs. High-end single-family detached housing is generally impacted least.”
Conversely, an impact fee on non-development—as opposed to a tax on development—makes sense because you can see the harsh impact of Seattle’s restrictive, status quo zoning every day: Rising rents; gentrification; development clustered along busy, polluted arterials (about the only place where developers can build dense housing). Indeed, the best thing we could do for transit isn’t levying a tax on development, but adding more development that would support robust transit.
The council should take up the impacts of our current zoning system—the one that’s responsible for forcing people to flee the city’s overpriced housing market—and they should propose an impact fee on the deleterious impact of Seattle’s longstanding, NIMBY prohibition on building homes.
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The following is an elaboration of the Sightline Institute’s testimony to Seattle City Council. Some additional points:
New research here [Oregon] suggests that impact fees are a bigger barrier to housing production than other revenue sources, especially for smaller, lower-cost housing types. This year, legislators in Oregon have been moving to limit or reduce local impact fees as the state tries to remove barriers to housing.
In 2022, the Oregon Housing and Community Services Department, the state’s affordable housing agency, released a major study of impact fees, which are known in Oregon as system development charges or SDCs. 1 It documented that typical impact fees in Oregon have more than doubled over the last 15 years, rising at about five times the rate of inflation.
Upon taking office in 2023, Oregon Gov. Tina Kotek convened a Housing Production Advisory Council to recommend future legislation for accelerating housing production, especially of lower-priced homes. The council will hear the first reading of a proposal to waive all impact fees for homes priced at up to 120 percent of area median income. “The social benefits of increased housing production outweigh the cost of forgone SDC revenue,” the body’s Finance Workgroup wrote. 3
Because new development is exempt from the constitution’s year-on-year 1 percent cap on property tax increases, fees that further reduce the rate of housing production may be of little net fiscal benefit to the city. The public would never be able to measure how many millions of dollars it’s missing out on.
A flat per-dwelling impact fee for multifamily dwellings regardless of size, as currently contemplated for Seattle, is a particular barrier for the lowest-cost home types, such as studio apartments, and those that can be financed by landowners with little access to capital, such as garage-to-ADU conversions. In Portland, annual ADU production rose 20x after the 2009 suspension of impact fees on ADUs. When those fees were largely reimposed in 2018, ADU production fell in half.
Michael Andersen, Senior researcher, housing and transportation, Portland, OR
1 Oregon Housing and Community Services, “Oregon System Development Charges Study.” December 2022.
3 Daniel Bunn and Ivory Matthews, “SDC offset incentive recommendation.” Oregon Housing Production Advisory Council Finance Workgroup, Oct. 6, 2023.
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Comment:
Josh Feit’s clinching remark is worth noting: “Instead of prescribing impact fees on new housing, the council should tax the impact of non-development”. We agree. However, vast tracts if single-family zoning prohibiting apartments is not the only problem. It is the holding of vacant and underutilized land out of production that is actual “non-development”. Of course prescribing development impact fees would not be applicable here. But imposing a high property tax on unused sites is appropriate. Changing to a land value tax (LVT) is the best solution to this problem.
Another point made by Mr. Feit: Homeowner wealth grows as inflationary pressures push up housing prices. Actually, most of the historical increase in prices is in the land component of real estate holdings. Land price inflation is largely speculative – fueled by the expectation of substantial financial returns from land ownership. Land rent is an unearned increment, accumulated with no labor or effort by the owner. Thus, it is the legitimate function of local governments to capture this surplus value through taxation.
Yes, an impact fee (or rather tax) on non-development—as opposed to a tax on development—makes sense, as does a tax on surplus value. Change the property tax to a split-rate land value tax – a high tax rate on land and low rate on improvements.
A few decades ago there was an active LVT movement in Washington state towards this end. Now would be a good time to reinvigorate this campaign. In fact, the Washington constituency of the Common Ground OR-WA chapter is growing in membership. Let’s start by encouraging the Seattle City Council to forsake impact fees and take a good look at incentive taxation.
Tom Gihring, Research Director
Common Ground, OR/WA
