This Monday, the Seattle City Council is set to vote on a housing “linkage fee” — a tax on development to fund low-income housing. Given that it got all five votes out of committee, passage seems reasonably certain. As a member of team density, I’m supposed to hate this proposal. It does have its problems, but I think there are strong arguments ($) on both sides.
Only government subsidies can provide low-income housing. Even if we had a perfectly efficient housing market — and we’re not even close to that — anyone who can’t afford to pay the cost of capital of constructing a new housing unit is going to be out of luck. This is one of the few problems Seattle can’t solve by simply lifting caps on development. If we’re going to have a city open to all, there is an unavoidable role for government subsidy of housing costs, either through cutting checks for housing assistance or actually building social housing. This subsidy has to be funded somehow! However,
A tax on development is just about the worst possible revenue source. If the goal is to create the conditions for housing for all income levels, and it should be, then taxing new units is counterproductive. It’s true that landlords of new developments are unlikely to simply “pass fees on to renters,” as they’re already charging what the market will bear. But future supply is important for affordability too, and it’s not enough to simply allow developers to eke out a small profit.
At the very least, projects have to cover the cost of capital. The Council’s consultant report says that “all projects that DRA concluded would be financially feasible with no fee or performance requirement would still be economically feasible after paying the proposed fee.” (p. 4) But this assumes a threshold for “feasibility” of 6% return for residential projects and 10% for commercial ones (p.7).
The problem is that Seattle projects are competing for financing with ones in Bellevue, in Portland, and even in Jakarta, to say nothing of non-development investment opportunities around the world. Anything that impairs profitability deters construction of economically marginal projects, which are the ones Seattle most desperately needs to encourage. Indeed, the report (p. 11) later admits that
DRA only studied a small number of prototypes and surely there will be some projects somewhere that would be feasible with no fee but cross the threshold into infeasibility with the addition of these fees… it is possible that a new fee could impact feasibility in the short term. Over the somewhat longer term, we would expect that these fees would lead developers to negotiate lower prices for land (or prevent land prices from rising as quickly as they otherwise would).
While the last bit, whenever it comes, might repair developer profitability, it merely shifts the supply constraint. If developers lower their bids, it is likely to reduce the amount of land available for development, choking supply in a different way.
I have to say, though, that I don’t have a lot of excellent alternative revenue sources to suggest in the current legal framework. Transportation taxes are pretty much used up, the Mayor’s office just got through explaining how property tax is basically spoken for, and the legality of truly progressive taxes is very much in dispute. Nothing has quite the net positives of just allowing more units to be built, but for low-income people that at best prevents the displacement of existing residents and nothing more. The best would probably be a land value tax, but for now perhaps that’s too far outside the box.
The Council’s website on the subject has an enormous amount of background and information. Read it over and let me know what you think in the comments.