One of the more interesting tensions in the urbanist left is over development taxes. Everyone is looking for a funding source to build subsidized housing, and skimming from developer profits is an attractive possibility. On the other hand, too much taxation will deter development, and exacerbate the housing shortage from the other end of the income spectrum. People who share a wide array of values still manage to fall on all points of this spectrum.

It might be useful to try to understand these differences in the context of another recent local debate, that over raising the minimum wage to $15 per hour. There are important similarities in the vocabulary of these discussions. Everyone is for improving the earning power of low-income workers. But if the minimum wage is set too high, it will deter job creation at the bottom. Unhelpfully, the history of almost every debate on regulation and taxes in American history is business owners complaining that change will destroy their business, a claim that usually proves to be heavily exaggerated.

Put that way, the similarities between this tradeoff and the developer tax tradeoff are obvious. One can be forgiven for dismissing protests that development will halt, in the same way the claims about hiring freezes were. As someone who tends toward the skeptical-about-fees side but supported the minimum wage, that’s a bit uncomfortable. But there’s a crucial difference: there’s a third side in the housing debate.

No matter what people thought about the minimum wage, no one was interested in destroying large numbers of jobs. That provided very strong incentives to not overshoot the wage level. Economics research is hard, but there’s a decent body of scholarship on this one-dimensional problem. Unfortunately, in the case of housing there’s a large contingent of people that would be thrilled if development ground to a halt. That utterly transforms the process of finding the optimum tax rate. It’s very easy to intentionally overshoot and cloak oneself in social justice when one’s true intent is to simply preserve neighborhoods in amber.

Now obviously we have no capability to figure out the true motivations of any particular actor. But it does introduce a structural objection to setting up a system where the City Council tries to figure out exactly how much they can extract out of developers before impairing population growth with all the benefits it brings. I find that objection convincing.

19 Replies to “Developer Taxes and the Minimum Wage”

  1. Yes, there are groups that can benefit from high unemployment: employers who want it to be an employer’s market when they hire, and hope to offer low wages to new hires. Their incentive to increase their power is parallel to NIMBYs in this regard. (I’m not saying all employers are this cruel, just that there is a strong incentive there, and the problem involves far more than a one-dimensional analysis.)

    That said, just look at how raising the minimum wage has worked out in Washington State, and Seattle: We have very low unemployment now, and a rather high quality of life. Those economics 101 textbooks always struck me as wishful hypothesis rather than anything backed up by neutral field observation. We can isolate the Higgs Boson, but we still have scientists being paid to say the evidence for climate change is still a matter of dispute, and that if we just apply leeches, unemployment will go away.

    I also have to argue that there is a subtle way to discern those opposed to all forms of development from those wanting to get the most affordable housing by taxing development: If they want to apply the same taxes and fees to residential construction as is being applied to commercial construction.

    The best give-away, of course, is if they flat-out tell us growth is bad. If they say that, I think we can take them at their word. I can respect that position, as that is the start of an honest debate.

    That debate was had in the HALA committee, and they got the answer right. We’re doing great in terms of office space, but poorly in terms of housing availability. The obvious answer is to apply some fees to commercial development that are not applied to residential development, and then we’ll end up with more residential development than we would have otherwise.

    1. I suppose I should also mention that onerous policies should be added to the list of taxes and fees. Applying an onerous policy, like limiting residential rent increases to something lower than the rate of inflation, helps dissuade developers from building residential construction.

      For those claiming that the city has no power to enact rent control, I have to remind you that the city, through the Seattle Housing Authority, is a landlord. The more they kick the can down the road on keeping rent in public housing below the rate of inflation, the bigger the maintenance backlog will get, and the more the city will become its own biggest slumlord.

      1. A city land value tax would help in many ways — https://en.wikipedia.org/wiki/Land_value_tax#Efficiency but I have no idea if it would be allowed under the WA State constitution.

        The city housing authority is just one of many social housing providers (many non-profits develop and manage housing). There is a raft of direct subsidies that keep it all afloat. Just like private sector housing it can be run into the ground. Thankfully good people keep it all going pretty well.

  2. Would it be legal to change the property tax rules in downtown seattle to be able to assess value on undeveloped lots (surface parking) for what could possibly be built on them? We need to do more to get owners of under developed lots in the downtown core to develop them for housing. There is too much “property hoarding” in the downtown core. All surface parking lots need to be built out.

    1. The most notorious vacant lot du jour is being held up in court thanks to a lawsuit filed by the Seattle Tenants’ Union, back when Jon Grant was its executive director. Amazingly inept attempts by the developer’s agents to threaten Grant into getting the Tenants’ Union to settle the lawsuit have been all over the new this week. His chances at winning went way up, as he may have just scared an entire $200,000 independent expenditure campaign into not happening. Or, he may have simply called their bluff.

      Either way, Triad hurt the whole developer community, by giving Jon a perch from which to demagogue against developers. I was impressed at how Jon handled this week’s events I would have been more impressed if he hadn’t taken cheap shots against developers as a class. Triad’s behavior was highly unethical. But that doesn’t mean all developers are evil.

      1. I always look down on that lot from my office and think, “man, $2 million to turn it into a surface parking lot for eight years, times 300 cars times $20 per day equals roughly $16 million in lost revenue to the city.

  3. I made the same analogy when the issue was debated on the Urbanist a few months ago. In the case of minimum wage, it is easy to see how the minimum wage will actually increase employment. An economy functions better when wealth is spread around. Meanwhile, there is negative pressure on employment because some employers won’t pay the higher wages. There is a “sweet spot” when the former exceeds for the latter. Thus there is the possibility that employment will increase as the result of raising the minimum wage (which is not the goal, but a happy side effect).

    There is a similar “sweet spot” with linkage fees. From what I understand, these fees have been applied and studied in very hot markets that are artificially constrained (via zoning restrictions) and have put very little downward pressure on growth. The money spent on housing has made up for the very small downward pressure. What worries me is two things. First, that it is seen as a major contributor to a solution; I doubt it can be. Second, what happens if the market actually levels off? For linkage fees to be harmless, the demand for growth and development has to be so high that paying the fee is a minor cost. But if the market levels off, then marginal property will not be developed. It is my understanding that the linkage fees already factor this possibility in, and are not going to be applied everywhere (an acknowledgement that there are still marginal properties in Seattle). But if costs level off — if this really is a rental housing bubble — then will the fees be removed so that more marginal property can be developed? That isn’t clear to me.

  4. It would be nice to think that the discussion in City Council or elsewhere were as simple as what level of taxes/fees is small enough to avoid significant impact on housing supply. You’ve pointed out the interests of a third party (anti-growth folks), and to that we can add a couple of magical-thinking habits: (1) the search for bad guys, and (2) conflating problems that can and should be separated.
    It’s a commonplace to claim that developers have caused rent and price increases, and this works to confuse the discussion because developers are an easy fall guy. So sure, set high fees, it’ll just come out of their profits. Well, maybe, or maybe not, but the discussion is short-circuited because a bad guy has been found.
    And if developer fees are a good (that is, efficient and non-distorting) source of revenue, that’s fine. But that’s an entirely different problem from housing affordability – or, more broadly speaking, the problem of income inequality. Whatever the revenue sources, solutions to those problems should be considered on their likely effectiveness, a discussion that is hard to find. For example, should a subsidy to low-income folks priced out of Seattle housing take the form of subsidized housing in Seattle? Or should they have the choice to apply that subsidy to commute costs from less-expensive suburbs? Or should it take the form of a sales-tax rebate? Or should they just get a direct payment?

    1. Income inequality is one problem. Sprawl (and its partner, climate change) are a separate problem.

      We’re not just trying to make Seattle affordable for the poor, but also for the middle class.

      Subsidized housing helps at one level, but that is not the only level that matters. When I hear what low-income renters are expected to pay, even I get sticker shock. That “affordable housing” isn’t really affordable. So, by attacking the problem of housing surfeit for the middle class (by increasing market-rate housing supply), hopefully the affordable housing thresholds can also be set lower to become truly affordable. Fortunately, the best and brightest experts on this issue (the HALA committee) have thought this through, and offered up a long menu of big and little fixes.

      A certain city council candidate doesn’t like what they came out with, and persists in pushing policies that may have the effect of short-term affordability improvements for current residents, as long as they are willing to not move, and exacerbate the long-term housing affordability crisis. And the region’s carbon footprint.

  5. Developer taxes (like Sales Taxes, B&O Taxes and all other taxes on Wage) are another case of the Longtimers taxing the Newcomers.

    The situation is a case where you have some people being charged through the nose and others getting a free boat. People enjoy the fruits of robust government services without paying anywhere near fair value for what they get.

    Only a fair and equitable Property Tax can remedy the situation. And that means removing the un-Constitutional ban on annual growth of property tax.

    All other discussion is moot if you don’t make reference to this rather large elephant in our mid-sized state.

  6. Like “Major Employer,” and “Advanced Degree-holder”, “Developer” is now a Constitutionally-forbidden Title of Nobility. Meaning power and deference-demands increase in reverse ratio to required performance.

    There were also long periods in our history when very few people needed a developer to build their house. That’s what neighbors are for. Would definitely give modern neighborhood associations something to do besides fight transit.

    Also, give developers pics, addresses, and asking price of homes built without them. Followed by some NRA-type declarations about some other freedom-guarding habits of the old days.

    I think this general discussion will draw a lot more interest, and comments, when we start to “channel” working people’s political outlook in the peak years of streetcar ridership. 1915?

    Speaking of which, JZ’s only about 20 miles away. Think I’ll call her up for coffee and find out if Ramtha was Transit Security.

    For all the real hardship, or maybe because of it, whatever else average people had to be resigned to, the inevitable wisdom of “market forces” was not one of them. Because the least formally educated of them knew what our generation’s opposite group has forgotten:

    In a market economy, important difference isn’t between buyer and seller, but between traders on both sides and the poor animal on the hook. But so nobody gets scared of being unelectable on this issue….for the time being make it a PCC free-range market!

    Mark

  7. This blog is not its best when it wades into issues of affordable housing, wages, and other economic issues.

    1. “Unfortunately, in the case of housing there’s a large contingent of people that would be thrilled if development ground to a halt. That utterly transforms the process of finding the optimum tax rate. It’s very easy to intentionally overshoot and cloak oneself in social justice when one’s true intent is to simply preserve neighborhoods in amber.”

      Jack, I think this discussion would go better if we get back to the key paragraph in the posting. Because the problem has been getting in the way of things ‘way worse than tax levels since W-2’s were rocks and brackets were segments of giant giraffe spines.

      Anthropologists will eventually find the Neanderthal term for “Line’s Just Fine ‘Cause I’ve Got Mine!” chiseled into the wall of a transit-meeting-cave just before a massive glacier pre-empted the agenda item of a proposed new Mammoth-boarding stop on the Lascaux line.

      Like every similar thing human, same impulse often responsible for good and bad results. All my life, I’ve been watching farms, forests, little towns and interurban lines obliterated with massive support from the very people who used to be passengers.

      And who also farmed and lived in the towns, and having just come back from the Depression and WWII, thought they deserved a less-constricted life. Car and all. Or car life and all.

      How many STB readers would now fault those who tried to stop the disaster we’re now trying to reverse? At least what they were trying to halt, these pages would never call progress now.

      Of everything in the way of rebuilding transit now, at least in the older neighborhoods of Seattle, this is the obstacle I’d worry least about now. Hardly any of those homeowners will be alive at all, let alone still living in the conflict zone, within the lifespan of transit now on the boards.

      To me, the real deadly serious problem is the one that will bring this discussion to life like whatever it is that wakes up a zombie.

      For all its accumulated intolerables, the Interstate Highway program and everything evil it spawned was part of a concerted effort to swiftly direct an unprecedented amount of wealth, happiness, and freedom economically downward. Because unemployed combat soldiers knew well-regulate. Meaning vote and get elected.

      Now, young workers of same station, veterans and otherwise, don’t have those short-learning-curved lifetime incomes to come back to. Hence transit’s- and everything else public’s- bitterest resistance from the very people who should welcome it most.

      So to me, the survival of a lot more than light rail depends on this country being able to catch the one break being offered us by history. Screw “stimulus”. The fact that our (barf!) Homeland is literally falling apart means there’s a lot more than one job for everybody currently out of work they can live on.

      Whether it makes them “electable” or not, somebody in any party needs to point out the amount of tax money already appropriated for exactly this kind of work and get it un- (puke) Sequestered!

      And some actual accountant needs go for precinct committeeman, and start clarifying for their constituents how a multiple-fatality collapsed bridge damages a balance sheet worse than the borrowing needed for repairs. And the way a real banker views a shop-owner who won’t take out a loan for new machines.

      Any grass-roots position- nobody’s going to fight you for Precinct Committeeman. Or the next three steps on up. Either party. Neither one’s saying “boo” on this topic. This is also how the Southern Democrats got the Republican Party.

      Yeah, a lot messier topic, smellier and more boring than tax policy and development incentives. But main is that raggedy as it is, the dandelion-and-thistle-root level of party politics is the one made for the average person to get in and get working. Starting junior high.

      And credible threat worse than Putin: anymore blank comment space, I’ll fill up ’til tomorrow morning’s posting. Filibusters work!

      Mark

  8. So you’re trying to make sure we haven’t overshot reasonable development fees, and you’re reassured in your position because some people are against growth? Aside from ignoring some power realities about who actually influences the agenda (see developers and $200k text threats for this week’s example), it seems like a rather indirect way of reasoning.

    Let me suggest another. We (the City) have already paid a consultant to analyze what reasonable development fees might look like. (http://obrien.seattle.gov/2014/10/14/affordable-housing-linkage-fee-proposal/)

    And now, according to this article (http://www.theurbanist.org/2015/10/01/how-seattles-mandatory-affordable-housing-program-will-work/), the proposal is to implement fees at less than 20% of the “conservative” level that the report recommended.

    Now I won’t pretend I’ve done any independent analysis of the report, but nor have I heard anyone seriously challenge or dispute it. Unless someone does, fees at 20% of a conservative level doesn’t really sound like overshooting the mark. Those who vigilantly guard development profits and incentives should be able to breathe easy now.

    1. The consultant, Cornerstone Partnership, appears to be in the business of building “affordable” housing. Of course, they would want to maximize fees paid into the cause of publicly-subsidized housing. They, like Jon Grant, are focused on maximizing subsidized housing supply, not overall housing supply. You may have noticed that these programs are a tax giveaway to developers. ;) I’m not saying I’m against them. I’m just saying that if you want to punch developers in the face (financially), taxing market-rate development to pay for publicly-subsidized development doesn’t achieve that effect.

      Not surprisingly, the consultant recommended applying the linkage fee to residential and commercial development alike. Incentivizing market-rate housing construction is just not one of Cornerstone’s goals.

      They also got one other important feature backwards: The linkage fee would be applied to multi-family residential construction, and single-family homes would be exempt (but that was before O’Brien withdrew his proposed ordinance in favor of HALA). Really, we should be exempting multi-family housing construction from the linkage fee, and applying the linkage fee to single-family houses. Of course, my intent there is not to maximize revenue from single-family home construction, but stop any more of them from being built in this town.

  9. Linkage fees are not enough to fund large amounts of affordable housing. But in a city that’s having a major housing boom, and a major shortage of funds for affordable housing, they shouldn’t be neglected either.

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