No on California Proposition 1

November 2018 election

Proposition 1 issues $4 billion in general obligation bonds for subsidized housing, infrastructure, homeownership subsidies, and home loans for veterans. While some of these programs could make housing more affordable, the inclusion of homeownership subsidies is questionable, and the bond repayment comes at the price of other important state government expenditures.

General obligation bonds mostly take funds from education and health programs

Before getting into the bond uses, it’s worth emphasizing this last point: California general obligation bonds are repaid as interest each year from the General Fund. In the case of Prop 1, that’s $170 million less in the General Fund, each year for the next 35 years. Prop 1 is not a new tax, so the pie is not grown, only reshuffled.

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Prop 1 does some good, but homeownership doesn’t need more subsidies

Prop 1’s $4 billion breaks down as follows:

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  1. Subsidizing housing. By subsidizing developers who build housing conditional on providing below-market-rate housing, this serves an indirect welfare purpose to low-income families.
  • Homeowners are tied to the location of their home, and this immobility has negative consequences at both the individual and economy-wide level.
  • Homeowners are more likely to show up to zoning boards to block new housing. Their incentives to keep property values high by reducing supply take a toll on newcomers and contribute to California’s housing shortage.
  • Homeownership subsidies are inevitably regressive, from the mortgage interest deduction, to capital gains tax exclusion for home sale profits, to California’s Prop 13 (from 1978, capping property tax rates and locking in assessments).
  • Younger people and urbanites are less likely to own. This could be due to affordability, but preferences may also play a part, considering the accompanying maintenance, volatility, lock-in, and perverse incentives. Public policy should not favor people based on their housing preferences.

Written by

Economist. Founder and president of the UBI Center. Studied at MIT and UC Berkeley. YIMBY. Former Google data scientist.

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