An old tactic could boost CA housing production

By William Fulton and Bill Higgins, especially for CalMatters

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Everyone knows California has a housing supply and affordability crisis. The average house price is about nine times the average household income, and there is no doubt that we need to increase housing production to deal with the problem.

The Legislature has passed about 500 new laws in the last decade mainly for replaced the local zoning authorityto overcome local resistance to new housing projects. He recently passed Senate Bill 79, which requires local governments to permit average residential buildings near major transit stops.

Despite these aggressive zoning reforms, housing production remains stuck at about 100,000 homes built per year — less than half of what is needed.

Even when housing is approved through expedited processes, the projects are not always built. Clearly, additional steps beyond zoning reform are needed.

The truth is, many projects simply won’t “pencil” under any circumstances, especially in infill locations targeted by government policy, where land is expensive and infrastructure improvement costs are high. For example, transit-oriented development is not economically feasible except in places where market rents are extremely highthe Urban Institute recently reported.

The time may be right to consider bringing back a narrowly tailored version of tax-increment financing — known in the past in California as “redevelopment” — to ensure that more housing is built at the right price, in the right places, with the right amenities.

Tax increment financing sequesters rising property tax revenue in targeted areas to pay for infrastructure and affordable housing in those areas.

He has been out of favor in California for 15 years, since Governor Jerry Brown killed the system as the state was forced to make up the property taxes that school districts were losing because of it.

But tax increment financing is used in nearly every state and around the world as a way to stimulate real estate and community development in desirable locations.

Given that California has a strong policy preference for increasing housing production and targeting that new housing in specific locations — as SB 79 suggests — tax increment financing may be the right tool to provide elusive financing for new housing projects.

In recent years, California has moved tentatively toward using tax-increment financing for specific purposes. Enhanced Infrastructure Financing Districts, for example, allow tax-increment financing for public infrastructure, but such districts lack the capacity for large-scale adoption.

A broader tax-increment financing system could go a long way toward ensuring that these housing projects that cities now have to approve actually get built.

For a new tax increase system to succeed, it must be carefully targeted to achieve government goals. And it should give cities enough incentives to use it.

A new system would almost certainly have to allow cities to use incremental increases in property tax revenue from both the city and the surrounding county to generate enough funds to make it worthwhile.

The resulting funds can then be directed toward funding gaps for residential and mixed-use projects that have an affordable component and for supporting infrastructure located in infill locations. For example, a certain percentage of tax increment financing funds could be directed to SB 79 projects.

Of course, many specifics must be taken into account. If county funds are used, there may be a limit in each county on the use of those funds. If school funds are also used, the state will likely have to approve those projects.

But these are details to be worked out. The broader point is that targeting tax-increment financing would give cities the tool they need to make sure all those housing projects approved under state law now actually get built — and help make a dent in California’s housing crisis.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.