No on California Proposition 10

November 2018 election

Imagine San Francisco were considering a $400 million per year tax on rents, with proceeds distributed as a rental subsidy. The city would structure the tax to be highest for renters who most recently moved into their homes, and structure the subsidy to be highest for people who have been in their homes longest, and for those with the most expensive homes.

Such a law would be roundly criticized as anti-immigrant and anti-young, and we would question why it attempts to neither explicitly tax the rich nor give to the poor. For such an enormous tax, why forgo a progressive policy design?

Yet this is exactly the law San Francisco has had in place since 1994: you might know it as rent control, which limits annual rent increases. That $400 million comes from a 2017 Stanford study, which found that rent control reduced rents by about that much for incumbents while raising market rents by a similar amount.

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In November, Californians will vote on Prop 10, which would allow cities to double down on this policy. Doing so would disadvantage immigrants, young people, and the economy. Prop 10 would give cities virtually limitless power over rent control, enabling them to block development amid the state’s worst housing shortage. The state should instead make housing affordable for everyone by ensuring more of it gets built and providing financial assistance to the most housing-insecure.

What are rent control and Costa-Hawkins?

If it passes in November, Prop 10 would repeal the 1995 Costa-Hawkins Rental Housing Act, which limits the types of rent control laws a city can impose. Under Costa-Hawkins, rent control cannot apply to single-family homes, condos, and units built after the earlier of 1995 or the city’s passage of their rent control (for example, 1979 in San Francisco). Costa-Hawkins also prohibits cities from limiting rent increases after a tenant moves out of their unit (such rent increase limitations are known as vacancy control).

Repealing Costa-Hawkins would enable cities like San Francisco to enact vacancy control and greatly expand rent control, potentially to all new buildings, single-family homes, and condos.

That annual $400 million tax on newcomers would skyrocket, and based on other research we could also expect:

  • Fewer rental units (the Stanford paper estimated a 6 percent drop)
  • Lower-quality rental units (in polls from 1992 and 2012, over 90 percent of economists assert that rent control has not had a positive impact on the amount and quality of affordable rental housing; empirical research supports this view, and vacancy control especially removes incentive to improve units after tenants move out)
  • More homelessness
  • Longer commutes (creating pollution) and fewer people living where they want to live

The most tragic damage could be the least visible: people shut out of economic opportunity due to high new rents in vibrant areas. These people may be in Stockton, West Virginia, or Mexico, and even if they believe they could improve their lives moving to Los Angeles or the Bay Area, they might never try. These missed opportunities don’t show up in local rent and income statistics, but Costa-Hawkins reduces their numbers behind the scenes.

But this just gives cities options, what’s wrong with that?

Cities’ land use decisions don’t operate in a vacuum. When California has the 2nd-fewest housing units per capita of any state and needs 4 million homes to escape its shortage, and cities like Beverly Hills plan only 0.1 percent growth per year, Sacramento would be abdicating its responsibility by leaving housing decisions to local control. State law already requires cities to plan for growth, and new legislation like Senator Scott Wiener’s (D-San Francisco) SB 828 would strengthen those requirements. Earlier this year, Senator Wiener proposed SB 827, which would have legalized apartment buildings near transit; while it died in committee, it sparked recognition that the state needs to play a part in addressing this fundamental challenge.

Repealing Costa-Hawkins would undermine any state legislation to address the housing crisis. If a second version of SB 827 passes next year, cities could effectively evade it by passing extreme rent control laws, such as rent and vacancy control on new construction. They could even use it as a threat against developers seeking protection behind state law, or against Sacramento’s efforts to enact new state laws. And the measure is written to prevent state legislation from acting as a check on even the most egregious oversteps; the only recourse against extreme rent control laws would be a long and uncertain court battle.

“Without Costa-Hawkins I’m concerned we’ll have cities that use rent control as a de facto ban on new housing.”

David Garcia, Policy Director, UC Berkeley Terner Center for Housing Innovation

One city already has a rent control expansion that would kick in upon Prop 10’s passage: Berkeley. Despite the bay area’s economic growth, Berkeley has grown its population 40% slower than California, having done so by consistently blocking housing.

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Source: Calculations by author

If Prop 10 passes, Berkeley would add vacancy control to its anti-growth arsenal, and if its Measure Q passes in November, so would a 20-year rolling window (exempting buildings newer than 20 years old). Housing finance professionals say that “rent control on buildings newer than 40 years…would negatively impact the supply of new housing.” Assuming historical patterns proceed, Berkeley’s law would cut by a third the incentive to develop housing projects. Projects on the margin of financial viability would have to either raise starting rents (hurting newcomers), go into the red, or cancel.

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Source: Simulation by author (code)

A 2016 report from the California Legislative Analyst’s Office predicted that expanding rent control “likely would discourage new construction,” would favor more affluent families in the rental market, and worsen the quality of housing. The report also states that rent control hinders mobility — a critical driver of economic growth and equity — for “households looking to move to California or within California” and “can cause households to stay longer in a particular location than is otherwise optimal for them.” California has a duty to limit cities’ protection of existing residents when it comes at the expense of other Californians and the state’s economy.

If not rent control, how can we achieve its goals?

Rent control is motivated by the noble goal of minimizing displacement of longtime residents, which can tear at the fabric of a community and uproot lives. But reducing displacement doesn’t need to come at the expense of newcomers. We can do it in targeted ways to ensure we’re helping people who need the help, rather than the many (even disproportionately) high-income people who benefit from rent control.

Building more housing is necessary but not sufficient. If we built enough such that market rents only increased by 2 percent a year, it would be as if everyone had rent control, without the problems created by rent control laws. Bills like SB 827 and SB 828 can make enormous impacts in getting cities to pull their weight, and Costa-Hawkins would ensure their effectiveness. But expanding the housing stock takes time and doesn’t guarantee benefits for the lowest-income people most vulnerable to rent shocks.

The most prominent alternative is below-market-rate (BMR) housing, whether that’s publicly-owned or private per inclusionary zoning requirements (which also reduce supply). BMR targets low-income renters, but its limited supply forces lotteries, demeaning application forms, and years-long waitlists. For the lucky few who get the units, moving is disruptive, as economics blogger Noah Smith writes:

Suppose you’re a long-time working-class resident who gets displaced by rising rents. Now the government offers you affordable [BMR] housing somewhere else in the city. Well, at least you still have a place to live, and at least you’re still in the city you’ve always lived in, right? But you have to move out of your home, which is expensive and emotionally draining. And you probably have to move to a new neighborhood, where your local ties will be weaker. In other words, it would have been better if you never had to move at all.

Section 8 housing vouchers are also means-tested, and don’t force renters to move. In theory, the voucher values could adapt based on available funds and qualifying households; in practice, the values are fixed, meaning they too require lotteries when demand exceeds supply. This differs fundamentally from housing subsidies for higher-income people, as Emily Badger said in her profile of San Francisco lotteries:

For homeowners, the mortgage interest deduction is available to anyone who qualifies. For poor renters, there is never enough housing assistance to go around.

The simplest solution may be the best

An ideal solution would guarantee a subsidy to low-income people, without byzantine requirements. The tax code is a natural place to do this, as the place where households already provide robust income reports. In this vein, Senator Kamala Harris (D-CA) just introduced the Rent Relief Act of 2018, a refundable tax credit for individuals spending over 30 percent of gross income on rent. Renters earning up to $25,000 would get a check for the entire excess; this phases out by income and provides no assistance for those earning $100,000, or $125,000 in high-cost areas. This is similar to 2017 legislation from Representative Joe Crowley (D-NY), and Cory Booker’s HOME Act also includes a renters credit.

These proposals needs fleshing out to avoid welfare traps and incentivizing more expensive housing, though it won’t pass with Republicans controlling Washington anyway. In the meantime, California could bolster its own (meager) renters credit, and individual cities could create their own.

Expanding cash assistance in California wouldn’t be new. The 2018–19 budget boosts spending on CalEITC — California’s version of the federal Earned Income Tax Credit, one of the most effective antipoverty tools — by 34 percent to $420 million. San Francisco also has a $150,000 version called the Working Families Credit, one of only three cities in the nation to do so. Both programs deserve dramatic expansion, given they respectively constitute only 0.2 percent and 0.002 percent of total state and city budgets; other California cities should also follow San Francisco’s suit. For example, if San Francisco raised the $350 million impact of rent control as a real tax, it could send $3,500 annual checks to each of its 100,000 households earning less than $50,000 per year. For some, rent control provides greater savings, but many of those are newcomers for whom rent control provides minimal, if any, benefit.

When California cities started implementing rent control and vacancy control in the 1970s, they were driven by good intent to keep housing affordable. Costa-Hawkins reined it in to avoid risky expansions that would be difficult to reverse.

The past 20 years of rent control evidence supports Costa-Hawkins. Rent control provides overt benefits to some, at the severe and hidden expense to many. Voters comfortable with that trade-off should still be concerned about giving cities total power over rent control, given their history of shirking responsibility to build badly-needed housing.

Evidence since Costa-Hawkins also supports alternatives. Cash assistance is among the best-studied interventions for poverty alleviation. Just as rent control could save a low-income renter $5,000 per year, so too could a $5,000 tax credit. We already have these tools in our arsenal, we just need to treat them as the powerful antidotes to housing insecurity they’ve always been.

In November, we should reject Prop 10 and get to work on better anti-displacement policies.

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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